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Essay / Research Paper Abstract
This 3 page paper looks at how and why it is possible for a firm that has profit levels that are increasing significantly to show a decline in the return on capital invested (ROCI). The example of Microsoft between 1997 and 2004 is used as an example. The bibliography cites 2 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEROCImsft.rtf
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Unformatted sample text from the term paper:
$11.33 billion1, but over the same period there was a decline in the return on capital invested falling to 17.5% from 32%. In order to consider how and why
it is possible for a firm to show a decline in the return on invested capital (ROIC) and still show an increase in the profit requires an examination of the
way that these are calculated. Looking at the way this is made up will allow potential causes of the pattern seen as Microsoft to be examined. The first consideration
is that there should not be confusion made between numerical values and margin values which are presented as a percentage. It may be assumed that just because the profit level
increases in dollar terms that the firms performance is improving. In terms of the profit being generated this increase can be measured in dollars. However, profit margins not only
a measure of the level of profit, it is also an indication of efficiency; it shows how much profit is made as a percentage of the total sales revenue generated
(Elliott and Elliott, 2007). The net profit margin is calculated by taking the net profit, that is the revenue after all costs have been deducted (sometimes this may be before
tax, it may also be after tax), and dividing this by the revenue and presenting it as a percentage. Therefore, if a firm makes a $10 profit and has a
turnover of $50, they have a profit margin of 20%. The issue is that where profit increase it is also likely that revenue is increasing. If the revenues
increase at a great rate than the profits, then the profit margin will fall. Therefore, if the profit increases to $20, but the revnue also increases, the overall level of
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