Why ROI might not be the best measure of firm performance?

ROI is the return on investment ratio. It shows how the firm is using their capital to generate profit. The formula is simple, plainly returns divided by investment. However, both of the words return and investments are loosely defined. Hence, ROI might not be the best measurement of a firm performance. In general a firm needs capital and resources to produce goods and services. By definition, ROI measures the ratio of returns to the cost of investment. If there is no return this ratio is 0, which means the firm breaks even. If there is a net loss, the ROI is negative. As a result, a positive ROI is favorable, but it does not mean that the firm is performing well. For example a small but positive ROI should not be considered a sign of good performance. Making 1$ on the investment is very different from making $1 million dollars.

 

Best methods for evaluating the performance of the top management team?

Using financial ratios is a good method, however, the ratios should be selected to show the complete picture of the firm. The ratios should not be prepared by the management team to ensure integrity. Investors and creditors should use the financial ratios of the company in context and comparison with major competitors and the industry. It is also useful to look for a pattern or a trend of development by using year-on-year analysis or multi-year reports and graphs.