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Hello Sir,
Could yoy kindly explain:
In calculation of ROI, in capital employed why do we not include intangibles and what difference does it make on ROI?
For maximisation of shareholders wealth, why is ROI not suitable?
Thank you.
I wasn’t aware that intangibles are not included. I would obtain the investment/capital employed by looking at the capital side of a SOFP: equity shares, reserves and long-term loans. Normally, only purchased intangibles would be in the SOFP
The higher the capital employed, the lower the ROI.
With regard to shareholder wealth maximisation, say a company has two mutually exclusive projects
A Cost $100; inflows $30 pa. ROI = 30%
B Cost $10,000; inflows $2,000 pa. ROI = 20%
But in terms of shareholder wealth A is trivial. ROI deals in relatives (income v investment). Other methods, such as NPV or RI, deal in absolute amounts.
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