Definitions for TrueValueMetrics
The idea of return is very common in the field of for profit investment ... but less so in the area of philanthropy and in public sector initiatives. The concept is simple ... an amount of money paid out now produces a flow of money back in the future ... a return.
In practice there are many ways to do the calculation. The different ways of doing the calculation reflect different priorities.
Return on Assets Employed. Return on assets is the best metric of the alternative 'return on' choices. From a pure economic performance perspective return on assets reflects the return that is beoing achieved by the deployment of resources, and is not affected by financial issues like the mode of financing and the related leverage. It is similar to Return on Capital Employed.
Return on Investment. Return on investment (ROI) is probably the most common and is used to measure results from the perspective of an investor. ROI is not a good measure of performance from most other perspectives, especially where financial leverage is being used to improve reported ROI. When profits are positive, financial leverage improves the ROI, but the same leverage with losses becomes catastrophic.
Return on Capital Employed. Return on capital employed (ROC) is a better measure of performance than investment. It measures how much revenue and profit are generated relative to the amount of capital being used, that is, the equipment and machinery, etc. (fixed assets) and the inventory, receivables, etc. (working capital). ROC eliminates the financing costs and leverage and provides a measure that is most closely related to real, that is technical, productivity.