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Use of the rate of return on investment in the evaluation of performance of a business and its executive. Gorelik, George


This paper is concerned with the use of the rate of return on investment in evaluating the effectiveness with which the enterprise assets are used by both divisional and top management. In large decentralized companies there is a diffusion of profit responsibility and there is a need for a common measure to evaluate the operating results of units of a business and the company as a whole, as well as to evaluate the performance of division and top management. The rate of return on investment ratio was investigated in terms of its components: sales, income, and investment. Since the unique characteristic of the rate of return measure is the inclusion of investment, definition and control over investment were found to be overriding factors. The conclusion of this paper is that the return on investment is one of the methods that can be used in measuring and evaluating performance. On the assumption that primary goal of business is profit, the discussion then describes certain conditions under which the rate of return on investment will effectively measure performance of a company and its divisions.

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