ACCA Performance Management (F5) Certification Practice Exam

What is the formula to calculate Return on Investment (ROI)?

1. Controllable profit / Total revenue

2. (Controllable profit / Capital employed) * 100

3. Net profit / Total assets

4. Operating income / Total liabilities

The correct answer is: (Controllable profit / Capital employed) * 100

The formula for calculating Return on Investment (ROI) is derived from the relationship between profit and the capital that has been invested in a business. The correct formula, which is reflected in the chosen answer, is (Controllable profit / Capital employed) * 100. This formula expresses ROI as a percentage, allowing businesses to evaluate the efficiency of their investment relative to the amount of capital that has been employed in generating that profit. By focusing on controllable profit, the formula emphasizes profits that management has direct influence over, thereby making the assessment more relevant for those responsible for operational decision-making. In contrast, other options do not reflect the standard definition of ROI as effectively. For instance, using net profit divided by total assets does not effectively capture the performance relative to the capital invested, as it may include non-controllable factors that can distort the true return on the investments made. Similarly, operating income divided by total liabilities does not align with the traditional ROI perspective, as liabilities do not necessarily represent the capital that has generated profit. Lastly, dividing controllable profit by total revenue does not provide a direct measure of return relative to investment, which is crucial for gauging financial effectiveness in utilizing capital.