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I am little bit unclear about residual income.
According to me, It is a investment centre checking. Like our company has subsidiaries so we check that how much money we will get in return to the capital employed.
Am I correct?
And please state difference between ROCE and RI. What are the things which ROCE does not disclose and RI does and vice versa.
Thank you in advance.Yes, RI is how much profit would be left if the subsidiary had to pay for its own finance.
ROCE is relative so good for judging the performance of subsidiaries of different sizes. RI is absolute.
If Division A has RI of 200 and Division B an RI of 400, this does not necessarily mean that the Division B or its manager is twice as good as Division A. Division B might simply be twice as big. However if Division A had an ROCE of 18% and Division B an ROCE of 20%, it can imply that Division B is making better use of its capital.
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