Question

Briefly outline, with a numerical example, the problems when calculation ROI with using a) Net Asset values and b) Gross Asset values.

Answer 1

ROI calculation using net asset values vs gross asset values

Net asset Value = Total Assets - Total Liabilities

Gross Asset value = total of the assets a company employes

Let us take an example of

Assets = $ 50 million

Liabilities = $ 25 million

Return = $ 10 million for the year

ROI using NAV = 10/25 = 40% ROI on NAV

ROI using GAV = 10/50 = 20% ROI on GAV

The measure used will depend on the users of the financial information.

If the measure is to find out asset productivity GAV ROI is more practical

If the measure is to find out Net returns on the business NAV is more practical .

RETURN ON NAV is the RETURN ON EQUITY.