The large dollar amounts reported in the financial statements of many companies make ratio analysis, the method of evaluating various financial characteristics of the company. In most cases, a single reason does not describe much about the company whose statements are being studied. A more significant analysis is achieved when the trend of that relationship is studied. The reason for comparing a particular company’s index to its competitor or to the entire industry is to assess the relative strength and position of the company. It is not enough to know the return on investment of a company during a quarter. It doesn’t say much about the company. That is the reason why we have to do a trend analysis. It results in a much more meaningful comparison because, although the data used in the relationship may have been developed under different financial accounting, consistency within each of the trends will be helpful in making comparisons.
“Show me the money” has been the most popular quote from the Jerry McGuire movie. It was used when the player wants his agent to make him earn more money. In today’s world, executives around the world use that mantra, as do shareholders. Executives are no longer satisfied with average results. Rather, leaders, shareholders, and even taxpayers want to see the economic return on their investment. Organizations use the fundamental equation of ROI, profit versus investment or net benefit versus cost for all types of projects. Why do organizations apply ROI to project types like leadership, marketing, communications, etc.? The reason is that everything must have a return on investment. Every project should make an organization a profit.
A company’s ROI is important to most financial statement readers because it describes the rate of return management was able to earn on the assets it had available for use during that particular year. Investors will make decisions based on ROI and make judgments about the quality of management and the relative profitability of a company. What will an investor do just knowing the net income? An informed judgment is needed to relate that net income to the assets that were used to generate the net income.
Some analysts prefer to use revenue from operations and average operating assets in the ROI calculation. The calculation is time consuming and needs accurate judgment. With technology making life easier for everyone, there is one such company that has made this calculation much easier. With organizations using ROI in their mix of measures, there is a company helping ROI methodology. iDNA, Inc, formerly known as National Auto Credit, Inc, operates in three primary segments: strategic communication services, information and entertainment services. iDNA has adapted one of its audience response systems to support the ROI methodology. The “ROI Toolkit” will collect real-time data and allow executives to forecast ROI. This technology will make it easier for analysts to forecast ROI and save time.
