This
KPI measures the ability of
your business to grow from the profits that it generates.
The
best time for a business to expand is when this KPI is showing an
increasing trend in line with the suggested baseline because this means
that any growth can be funded by the company's profits as opposed to
borrowed funds.
Example:
A) Net Profit Before Interest = R508,327 B) Funds Employed = R2,420,610 C) Return On Investment = 21% (A ÷ B X 100)
Discussion:
When
anyone sets up a business, the main aim is to generate a profit.
Obviously, you need sufficient profit to pay all the bills and salaries
with some left over to enable the business to grow in the forthcoming
year.
The
reason that interest is not shown within this equation is because it
measures the amount of profit being generated without any interference
of borrowed funds.
If
the trend of this KPI is diminishing, then you might choose to
reconsider your overall business viability, as you will have a greater
dependence upon borrowed funds, therefore increasing interest charges
and reducing profitability.
Related Terminology:
This
KPI is also known as Return on Funds Employed.