Return on Investment is a metric that helps in assessing the performance and returns according to the cost of funds injected into a project (Rand and Tankel, 2015, p.150). According to Petria, Capraru and Ihnatov (2015, p. 76), the ROI helps in justifying whether an investment is profitable or not. ROI plays a vital role for investors because they can relate to the results of various initiatives. A positive return on investment will help to source for more funds because it attracts more people to invest in the project (Wittenberg et al., 2017, p. 32; Davies et al., 2016, p.).
A negative ROI will have an adverse impact on a project because people will shy away from an investment that is not profitable. The ROI is significant because it explains the position that investment has in an industry (Rackley, 2015, p.48; Maxson et al., 2017, p. 491). International investors will look for opportunities in countries that have industries with a positive ROI. It is important for people within and without the country to make investment decisions. A positive ROI will have a positive impact on the performance of an economy and vice versa (Baños et al., 2014, p.337).
Return on investment will have a direct impact on the performance of an industry in different economies across the globe.
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
Impact Of ROA On Financial Performance
Return on Assets evaluates how effective a company is in using its resources to generate positive revenue (Al Nimer, Warrad and Al Mari, 2015, p.230). ROA helps a manager in assessing how various assets helps the company in generating profits. It becomes easy to understand the efficiency of the management in an organization. ROA is important for managers and investors in decision making because they will look to invest in companies with high levels of efficiency (Suardana, Astawa & Martini, 2018, p.111). A positive ROA will lead to more investment by people in the society which is good for the company. Al Nimer, Warrad and Al Mari, (2015, p.230), argues that a positive ROA is vital in shaping the attitudes of managers in an organization. It shapes the business strategy that a company will embrace in the business process. Economists also argue that a positive ROA for companies in a country shows that the economy is performing well (Rand and Tankel, 2015, p.151).
However, ROA is not a good measure of efficiency since it can take into consideration assets that do not play a vital role in the revenue of an organization. It is important to find a measure that highlights all aspects of an organization in determining the levels of efficiency and output of individual departments. This process gives better results to investors and other players in a country.
A positive ROA will have a good impact on the financial performance of a company.
ROA = Net Income / Total Assets
Impact Of ROE On Financial Performance
ROE looks at how a company will benefit from the shareholders’ investment (Heikal et al., 2014, p.101). ROE evaluates the profitability of a single share to assess how profitable the business will be in future (Carlo, 2014, p. 155). It helps the managers decide on whether or not to float shares and evaluate the performance and direction of a company (Abraham, Harris and Auerbach, 2017, p.10). Investors also use ROE to decide where to channel their funds. ROE is important because it speaks to investors on the performance of an organization (Moghaddam and Talebnia, 2016, p.2052; Guo and Wang, 2016, p.113). It can also help managers in making changes that will promote efficiency. It, therefore, has a positive impact on financial performance of an organization. ROE has a positive impact on the performance of an organization by yielding revenue that generates higher dividends (Guo and Wang, 2016, p.113).
A positive ROE will affect the performance of a business.
ROE = Net Income/Shareholders’ Equity
Impact of Market Share On Financial Performance
Market share refers to a percentage of the total customers that a company enjoys in a particular region (Arthur, 2018, p.22; Huang and Sarigöllü, 2014.p.117). The market share helps in defining an organization will engage in marketing and communicating initiatives. A significant market share will require little marketing and vice versa (Perrucci, 2017, p.520; Jumono et al., 2015, p.18). The market share is important because it helps when dealing with competition and setting the business model of an organization (Petria, Capraru and Ihnatov, 2015, p. 76; Todorov, 2015, p.46). It has a positive impact on the performance of an organization because it helps to forecast on future sales and revenues (Faria and Wellington, 2014, p.17). It can be a decision-making tool for managers and investors in the society on the direction to take. A good market share will reduce the cost of operation because a company does not have to invest too much money in marketing their products (Perrucci, 2017, p.522). Economists also prefer a good market share because they can take advantage of pricing policies and using models that favour their business practices (Todorov, 2015, p.47).
The market share will affect the financial performance of an organization.
Impact Of Borrowing Capacity On Financial Performance
Borrowing Capacity refers to the ability of an organization to access debt from banks or other lenders in the business environment (Gersbach and Rochet, 2017, p.117; DeFusco, 2018, p.541). It helps in understanding the financial capacity of an organization and its ability to engage in new projects (Kjenstad, Su and Zhang, 2015, p.23). The borrowing capacity is vital because it communicates the financial health and performance of a company (Qian and Yeung, 2015, p.260; Guerrieri and Lorenzoni, 2017, p.1429). It will have a direct impact on the ability of an organization to expand and increase its revenue by taking advantage of new markets.
A borrowing capacity affects the ability of an organization to expand into new markets (Kjenstad, Su and Zhang, 2015, p.24). It makes it easy for banks and other financial entities to give loans and buy shares since it can generate higher revenues. A low borrowing capacity does not mean that a business is not performing well because the size of an organization also defines the borrowing capacity (Guerrieri and Lorenzoni, 2017, p.1430). However, an organization will benefit from a large borrowing capacity because it affects their ability to venture into new areas that will generate high levels of income.
Borrowing capacity will directly affect the performance of an organization in the short and long-term.