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Does the Way Variables Are Calculated Change the Conclusions to Be Drawn? A Study Applied to the Ratio ROI ( Return on Investment )

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  • Tiago Patrocínio

    (Department of Economics, Management, Industrial Engineering and Tourism (DEGEIT), Universidade de Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal)

  • Mara Madaleno

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Department of Economics, Management, Industrial Engineering and Tourism (DEGEIT), University of Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal)

  • Manuel Carlos Nogueira

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Department of Economics, Management, Industrial Engineering and Tourism (DEGEIT), University of Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal)

Abstract

This research aims to analyse the financial performance of companies using one of the most used profitability indicators, the return on investment (ROI), which measures the company’s performance in terms of the profit generated over time. To this end, several different methods are used to calculate the ROI indicator, considering the different calculation methods used by different authors over the years. The use of different ROI calculation formulas has been identified in the literature, leading to different conclusions. Based on a sample of 2805 Portuguese companies, it examines how the different indicators react to the different variables analysed, using nine different econometric models. Through this study, it is possible to verify that the different variables that depend on the return on investment have different results, namely that the variables “age” and “size” have a negative effect on the return on investment. On the other hand, “financial leverage” and “ROA” have a positive impact on the contribution to the return on investment. We also found that the different variables behave similarly for virtually all types of ROI calculation, although not completely harmonious, especially in terms of impact. The results are empirically vital, as they alert researchers and companies to the need for standardised formulas for calculating variables such as ROI so that results are not distorted. Using one to the detriment of the other impacts the results obtained and the analyses to be carried out. How empirical research will continue to use the ROI metric will always depend on its users’ discretion and free will.

Suggested Citation

  • Tiago Patrocínio & Mara Madaleno & Manuel Carlos Nogueira, 2024. "Does the Way Variables Are Calculated Change the Conclusions to Be Drawn? A Study Applied to the Ratio ROI ( Return on Investment )," JRFM, MDPI, vol. 17(7), pages 1-11, June.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:7:p:266-:d:1423343
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    References listed on IDEAS

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    1. Raja Abid, 2023. "Corporate social (ir)responsibility towards employees and financial performance: using time to solve the chicken-egg problem," Review of Managerial Science, Springer, vol. 17(2), pages 635-659, February.
    2. Hyunju Shin & Alexander E. Ellinger & Helenka Hopkins Nolan & Tyler D. DeCoster & Forrest Lane, 2018. "An Assessment of the Association Between Renewable Energy Utilization and Firm Financial Performance," Journal of Business Ethics, Springer, vol. 151(4), pages 1121-1138, September.
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