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Show Me the Money: Basics of ROI

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The large dollar amounts that are reported in the financial statement of many companies make ratio analysis, the method of evaluating various financial characteristics of the company. In most cases a single ratio does not describe very much about the company whose statements are being studied. More meaningful analysis is accomplished when the trend is studied of that ratio. The reason for comparing a particular company’s ratio either to its competitor or the whole the industry is to assess the relative strength and standing of the company. Just knowing a company’s return on investment for one quarter is not enough. It does not tell you much about the company. That’s the reason we have to do a trend analysis. It results in much more meaningful comparison because even though the data used in the ratio may have been developed under different financial accounting, the consistency within each of the trends will be useful in making comparisons.

“Show me the money” has been the most popularized quote out of the movie Jerry McGuire. It was used when the player wants his agent to make him more money. In today’s world executives everywhere are using that mantra so are the shareholders. Executives are no longer satisfied with average results. Rather, leaders, shareholders, and even the taxpayers want to see the economic return on their investment. The organizations use the fundamental ROI equation earnings compared to investment or net benefits compared to costs to all types of projects. Why organizations are apply ROI to types of projects such as leadership, marketing, communications, etc? The motive is that everything should have a return on investment. Every project should make an organization a profit.

The ROI of a firm is significant to most financial statements readers because it describes the rate of return management was able to earn on the assets that it had available to use during that particular year. Investors will make decisions based on ROI and will make judgments on the quality of management and the relative profitability of a company. What will an investor do by just knowing the net income? An informed judgment is needed to relate that net income to the assets that were used to generate the net income.

Some analysts prefer to use income from operations and average operating assets in the ROI calculation. The calculation is time consuming and need precise judgment. With technology making life easier for everyone, there’s one such company that has made this calculation much easier. With organizations using ROI into their measurement mix, there’s one company that’s helping the ROI methodology. The iDNA, Inc, formerly known as the National Auto Credit, Inc operates in three principal segments: strategic communication services, information services and entertainment. iDNA has adapted one of its audience response systems to support ROI methodology. The “ROI Toolkit” will collect data, in real time, and allow executives to forecast ROI. This technology will make it easier on analysts to forecast ROI and will save time.



Source by Kashyap S Shukla

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