The Government of India issued a notification on 24 March,2021 amending Schedule III to include certain additional presentation and disclosure requirements. The amendment requires companies to provide analytical ratios along with an explanation of the items included in numerator and denominator for computing these ratios and a commentary explaining any change in ratio by more than 25% compared to last year ratio. One such ratio that has caused an upheaval and is seemingly not so useful is ROI.
What is the issue with Return on Investment Ratio?
Whether to be computed from company’s asset perspective or from investor’s perspective
A Guidance note issued by ICAI on Sch III explains that this ratio is to be computed from Company’s perspective of returns earned on each investment made using the following formula:
ROI: {MV(T1)–MV(T0)–Sum[C(t)]}
{MV(T0) + Sum [W(t) * C(t)]}
T1 = End of time period
T0 = Beginning of time period t = Specific date falling between T1 and T0
MV(T1) = Market Value at T1
MV(T0) = Market Value at T0
C(t) = Cash inflow, cash outflow on specific date
W(t) = Weight of the net cash flow (i.e. either net inflow or net outflow) on day ‘t’, calculated as [T1 – t] / T1
The formula stated above requires companies to have a date wise tracking of cash flows in order to compute ROI. But for the companies making investments on regular basis, it is a cumbersome task, thus they are opting for a simpler approach using following formula for computing ROI :
ROI : Income generated from current investments
Average invested funds in current investments
Where,
INCOME GENERATED FROM CURRENT INVESTMENTS INCLUDES:
For companies preparing financial statements as per
AVERAGE INVESTED FUNDS IN CURRENT INVESTMENT INCLUDES:
Opening current investments +Closing current investments
