Audit

Chapter 8

Return On Invested Capital And Profitability Analysis

REVIEW

Return on invested capital is important in our analysis of financial statements. Financial statement analysis involves our assessing both risk and return. The prior three chapters focused primarily on risk, whereas this chapter extends our analysis to return. Return on invested capital refers to a company's earnings relative to both the level and source of financing. It is a measure of a company's success in using financing to generate profits, and is an excellent measure of operating performance. This chapter describes return on invested capital and its relevance to financial statement analysis. We also explain variations in measurement of return on invested capital and their interpretation. We also disaggregate return on invested capital into important components for additional insights into company performance. The role of financial leverage and its importance for returns analysis is examined. This chapter demonstrates each of these analysis techniques using financial statement data.

OUTLINE

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|Importance of Return on Invested Capital |

|Measuring Managerial Effectiveness |

|Measuring Profitability |

|Measuring for Planning and Control |

|Components of Return on Invested Capital |

|Defining Invested Capital...