August 2011
Beginner
547 pages
16h 12m
English
Content preview from Fundamentals of Financial Management, Third Edition
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21.1 RETURN-ON-INVESTMENT LEVERAGE
It has already been pointed out in Chapter 19 that the ROI indicating a firm’s efficiency in earning profits is a function of both the profit margin and asset turnover. Based on Eq. 19.6 in Chapter 19, we can state that, ROI is a function of:
- Operating profit
- Sales
- Asset turnover
Roi indicating a firm’s efficiency in earning profits is a function of both the profit margin and asset turnover.
Any improvement in ROI can be brought about by reducing various costs—production, selling and administrative — so as to raise earning before interest and taxes (EBIT) and thereby the profit margin. At the same time, ROI can be raised through reducing investment in assets with the same amount of sales or raising the volume ...
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