EXPERT RESPONSE
I went to Ventureline.com, where they have a very nice dictionary of accounting terms, and looked these up since they always give me trouble remembering which is which.
NET PRESENT VALUE (NPV) is a method used in evaluating investments, whereby the net present value of all cash outflows (such as the cost of the
investment) and cash inflows (returns) is calculated using a given discount
rate, usually required rate of return. An investment is acceptable if the NPV is positive. In capital budgeting, the discount rate used is called the hurdle rate and is usually equal to the incremental cost of capital.
INTERNAL RATE OF RETURN (IRR) is also called the dollar-weighted rate of
return. IRR is calculated as the interest rate that makes the present value of the cash flows
from all the sub-periods in an evaluation period plus the terminal market
value of the portfolio equal to the initial market value of the portfolio.
RETURN ON INVESTMENT (ROI) is a profitability measure that evaluates the
performance of a business. ROI can be calculated in various ways. The most
common method is Net Income as a percentage of Net Book Value (total assets
minus intangible assets and liabilities).
Other ways to measure payback include the following:
RETURN ON ASSETS (ROA) shows the after tax earnings of assets. Return on
assets is an indicator of how profitable a company is. Use this ratio
annually to compare a business' performance to the industry norms: The
higher the ratio the greater the return on assets. However this has to be
balanced against such factors as risk, sustainability and reinvestment in
the business through development costs.
RETURN OF CAPITAL is the distribution of cash that resulted from tax savings on depreciation, sale of a capital asset or securities, or any other sources unrelated to retained earnings.
RETURN ON CAPITAL EMPLOYED (ROCE) is a measure of how effectively the
company is using its capital. The formula to measures the return on all the
assets the company is using: Profit before interest and tax (PBIT)/(total
assets - current liabilities).
RETURN ON EQUITY (ROE) measures the overall efficiency of the firm in
managing its total investments in assets and in generating a return to
stockholders. It is the primary measure of how well management is running
the company. ROE allows you to quickly gauge whether a company is a value
creator or a cash consumer. By relating the earnings generated to the
shareholders' equity, you can see how much cash is created from the existing
assets. Clearly, all things being equal, the higher a company's ROE, the
better the company.
RETURN ON INVESTED CAPITAL (ROIC) is a measure of how effectively a company uses the money (owned or borrowed) invested in its company operations. It is calculated by: net income after taxes/(total assets less excess cash minus non-interest-bearing liabilities).
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