Roi: Practical Theory And Innovative Applications

ItETURN ON INVESTMENT Practical Theory and Innovative Applications (Revised and Enlarged Edition) 4 ROBERT A. PETERS Digitized by the Internet Archive in 2019 with funding from Kahle/Austin Foundation * https://archive.org/details/roipracticaltheoOOOOpete ROI Practical Theory and Innovative Applications •• ROI Practical Theory and Innovative Applications Revised Edition Robert A. Peters ama com A Division of American Management Associations Library of Congress Cataloging in Publication Data Peters, Robert A ROI : practical theory and innovative applications. Includes index. 1. Capital investments. Accounting. I. Title. HG4028.C4P38 1979 ISBN 0-8144-5496-8 2. Cashflow. 332.6’34 3. Profit— 78-11327 © 1974, 1979 AMACOM A division of American Management Associations, New York. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, with¬ out the prior written permission of AMACOM, 135 West 50th Street, New York, N.Y. 10020. Second Printing Preface THE “income and expense statement,” which attempts to match costs against revenues, has been the traditional measure of financial accomplish¬ ment. In recent decades, however, two evolutionary changes in the environment of busi¬ ness have eroded its value. First, a combination of technical and social advances has increasingly substituted capital for labor in manufacturing. Second, profit itself as nor¬ mally reported has become a product of many artificial and transient influences such as depreciation practices, tax laws, and latitude in “generally accepted accounting principles.” Consequently, a genuine need exists to devise a better standard for measuring financial results. The increasing dominance of capital, or cash, in terms of both an investment and a return suggests that these outflows and inflows can provide a more incisive basis for metering business progress. Of even greater importance, statistics also show that since World War II the sharp rise in capital employed by durable goods manufacturers has produced an ever deteriorating reward. While dollar earnings have continued in an upward trend, the investment neces¬ sary to generate these earnings has risen faster; consequently, return on investment has been declining steadily. American industry is being threatened with economic malnutri¬ tion. The danger signals are clear, and a need for understanding and attention to this matter has become vital. Though “return on investment” is both familiar and generally accepted as a concept, suitable mechanics for applying it comprehensively have been lacking. Only for individual investment decisions has ROI begun to come into common use. In this book, the author offers a cash-oriented ROI approach to business economics that is theoretically sound, easy to understand and employ, and virtually universal in its applicability. Discussion begins with a documentation of the alarming trend toward more investment, less return. Then the problems associated with traditional concepts of profit are identified. After the reader is warned against a number of inaccurate simulations of ROI, a fundamental theory from which all true applications may flow is offered—a technique as uncomplicated and utilitarian as the safety pin. Next is an explanation of how this basic approach is adapted for a total business. Succeeding chapters describe essentially new or seldom employed ways to provide ROI insight into and analysis of business results. For example, Chapter 11 shows how ROI dominates and governs earnings-per-share trends, and warns that indefinite continuation of i