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The earning power of assets measured as the ratio of the net income to the capital employed in a company or Department. Return on investment is a measure of profitability that indicates whether or not a company is using its resources in an efficient manner
Formula:
ROI = Operating Income / Capital Employed *
Important Points:
§ROI is the key performance measure for an investment center.
§ROI can be used to evaluate the performance of the entire firm.
ROI is a relative measure
Residual Income (RI)
Net income that an investment can earn over the minimum rate of return (time-deposit interest rate).
Formula:
RI = Operating Income – (capital employed * required rate of return)
RI is an absolute measure thats why can not be utilised for comparability purpose
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