Components of ROL Alternative Measures of Invested Capital Five Common measures: Total Financing (Total Debt plus Total Equity) Long-Term Debt Plus Equity ° Equity at Market Value of Invested Capital Investor Invested Capital
Components of ROI Alternative Measures of Invested Capital Five Common Measures: • Total Financing (Total Debt plus Total Equity) • Long-Term Debt Plus Equity • Equity • Market Value of Invested Capital • Investor Invested Capital
Components of ROL Total Debt and Equity Capital Perspective is that of its total financing base Called return on assets(ROA) ROA: measures operating efficiency /performance +reflects return from all financing e does not distinguish return b financing sources
Components of ROI Total Debt and Equity Capital • Perspective is that of its total financing base • Called return on assets (ROA) ROA: ◆ measures operating efficiency /performance ◆ reflects return from all financing ◆ does not distinguish return by financing sources
Components of ROL Total Debt and Equity Capital Some adjust this invested capital base for 1. Unproductive Assets 2. Intangible Assets 3. Accumulated Depreciation
Components of ROI Total Debt and Equity Capital Some adjust this invested capital base for: 1. Unproductive Assets 2. Intangible Assets 3. Accumulated Depreciation
Components of ROL Total Debt and Equity Capital Unproductive Asset Adjustment Assumes management not responsible for earning a return on capital not in operations Excludes idle plant, facilities under construction, surplus plant, surplus inventories, surplus cash, and deferred charges from invested capital Adjustment is not valid as it fails to recognize that management has discretion over all investment assess overall management effectiveness
Components of ROI Total Debt and Equity Capital Unproductive Asset Adjustment • Assumes management not responsible for earning a return on capital not in operations • Excludes idle plant, facilities under construction, surplus plant, surplus inventories, surplus cash, and deferred charges from invested capital Adjustment is not valid as it fails to: ➢ recognize that management has discretion over all investment ➢ assess overall management effectiveness