S. P.

Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

RETURN ON INVESTMENT (ROI)

(Du. Pont control chart) E.I. Du. Pont De Nemours Powder Co. of USA - Mfg. of High Explosives. - Then one of the worlds largest chemical Cos Du-pont managers Developed concept of ROI. The true test of whether the profits are too great or too small is the rate of return on the money invested in the business and not the percent of profit on cost. Earning Power = Sales Profitability x Asset Efficiency

Measures overall effectiveness in generating profits with available assets = NPAT Total Assets

Measures profitability with respect to sales generated x NPAT Net Sales

Measures efficiency in using asset to generate sales Net Sales Total Assets

This basic Du-Pont analysis may be extended to explore the determinants of Return on Equity.
NPAT NPAT Net Sales Total Asset ------------------------ = ------------ x --------------- x --------------------Shareholders Equity Net Sales Total Asset Shareholders Equity

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

Notes prepared by Prof. M. B. Thakoor Page 1

S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

DU PONT CHART
Rate of Return On Investment Net Profit as Percentage of Sales Multiplied by Investment Turnover

Net Profit

Divided by

Sales

Sales

Divided by

Total Assets

Gross Profit = Sales less cost of goods sold Minus Alternatively

Fixed Assets

Plus

Current Assets

Expenses Selling Administrative Others Long-term borrowed funds Minus plus

Shareholders equity Plus

Income-Tax Plus Current Liabilities

Long-term borrowed funds

Notes prepared by Prof. M. B. Thakoor

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S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

WAYS OF IMPROVING ROI ROI NPAT Sales = -------------- x ---------------Sales Total Assets

(1) Either improve one of the Ratio (2) Reduce costs (3) Improve sales (4) Do investments in those areas which generate more sales, more market share etc. NPAT --------Sales = Cost reduction areas to improve profit.

Sales ---------------- = Total asset = F.A. + C.A. Total Assets Shows how effectively you use the asset To improve use techniques such as:(1) Inventing Control (2) Receivable Management (3) Cashflow Management (4) Optimum utilisation of Asset to give better productivity (5) Proper Control over inventory & debtors.

Notes prepared by Prof. M. B. Thakoor

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S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

ROI IS NOT THE END OF FINANCIAL OBJECTIVE

ROI is a ratio ROI by themselves means NOTHING THUS ROI must be compared with (1) A Norm or a target (2) Previously attended ROI to see the Trend (3) ROI with industry Average. ROI IS NOT THE END OF FINANCIAL OBJECTIVE. (1) ROI is calculated from Financial Statements where different policies such as stock valuation, depreciation is used. (2) Financial statement do not represent a complete picture other factors also are to be considered ex. Environmental factor. (3) Improvement in ROI only could be dangerous. Ex. Return on Total Assets can be improved by reducing assets rather than increasing sales. There are other objectives of financial manager too. ROI is not the only object.

Notes prepared by Prof. M. B. Thakoor

Page 4

S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

OTHER OBJECTIVES 1) MAXIMISING SHAREHOLDERS VALUE/WEALTH :This is achieved though timely & reasonable dividend. (2) SOCIAL RESPONSIBILITY & ACCEPTABILITY :Henry Ford A Business that makes nothing but money, is a poor kind of business. A business organization has to co-ordinate its business activities with social wants too. This will help to build image & goodwill in the society.

Notes prepared by Prof. M. B. Thakoor

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S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

EXEMPTION V/S DEDUCTION

MAT is charged on book profit as calculated by the I.T. regulation II CALCULATION OF BOOK PROFIT. Net profit as per financial A/c. Add. Provision for Taxn. Dividend Transfer To reserve Provision for unascertained liability (Prov. For Bad-debt) Exps. Incurred to earn exempt income Less: 1) Transfer from reserve 2) Exempt Income 3) B/fd. loss OR unabsorbed depreciation whichever is lower Book profit xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Notes prepared by Prof. M. B. Thakoor

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S. P. Mandalis

WELINGKAR

Institute of management development & research

Lakhamsi Nappo Road, Next to R. A. Podar College, Matunga, Mumbai 400 019

COMPUTATION OF TAX LIABILITY UNDER MAT

STEP 1:

Compute the tax under normal provisions of Income Tax Act 1961

STEP 2: STEP 3:

Compute the tax under MAT Answer = Step 2 or Step 3 whichever is higher

Notes prepared by Prof. M. B. Thakoor

Page 7