Investment Strategic Business Unit (SBU)
This is a unit or segment within the organization where the manager is responsible for the control of
revenues, costs and investments made in that SBU.
Examples: (1) Magnolia Products Division of San Miguel Corporation; (2) Banco de Oro of SM
Investments Corporation; (3) Real Estate Division (Ayala Land) of Ayala Corporation.
How to Evaluate an Investment SBU?
1. Return on Investment (ROI)
2. Residual Income
3. Economic Value Added (EVA)
Return on Investment (ROI)
A financial ratio used to calculate the profitability of an investment.
a. Return
- Net operating income
Amount of profit realized after deducting operating expenses from gross revenue.
b. Investment
- Operating asset
Asset acquired for use in the conduct of the operations of the business.
How to Compute Return on Investment (ROI)?
ROI = Net Operating Income/ Average Operating Assets
ROI = (Net Operating Income / Sales) x (Sales / Average Operating Asset)
ROI = Operating Profit Margin x Asset Turnover (Return on Sales)
Advantages
1. It is easily understood and has gained wide usage.
2. It is comparable to interest rates of returns of alternative investments.
Disadvantages
1. It is susceptible to manipulation.
2. It disregards the factor of time.
Exercise 4 (ROI, RI, Comparisons of Two Divisions)
Catleya Company has two divisions (A and B) that operate in similar
markets. Selected data on the two divisions follow:
Sales
Net Operating Income
Average Operating Assets
Division A
Division B
9,000,000
20,000,000
630,000
1,800,000
3,000,000
10,000,000
Required:
1. Compute the ROI for each division.
Formula:
ROI = Net Operating Income / Average Operating Assets
Solution:
Division A
Division B
630,000 / 3,000,000 = 21%
1,800,000 / 10,000,000 = 18%