Accounting Rate of Return
Accounting rate of return is a core ratio for investment analysis. The concept explains what ARR is, some of its strengths and weaknesses (and additional measures to compensate for these drawbacks) and the various different approaches to measuring and applying ARR.
Accounting Rate of Return Definition
Accounting Rate of Return is the “ratio of annual accounting profit to the average of the opening and closing book values” (Harcourt, 1965). It is the “ratio of accounting profit earned in a particular period to the book value of the capital employed in the period” (Salamon, 1985). According to Stark (2004), accounting rate of return is a measure of profits divided by a measure of the capital employed to generate such profits. Profits can be measured before or after tax, before or after interest (Stark, 2004).
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Accounting Rate of Return References (4 of up to 20) *
- Arnold, G. (2007). Essentials of corporate financial management. Pearson Education, Ltd., London.
- Bhimani, A., Horngren, C. T., Datar, S. M., and Foster, G. (1999) Management and Cost Accounting. Prentice Hall, England.
- Brief, R. P. and Lawson, R. A. (1992) The role of the accounting rate of return in financial statement analysis. The Accounting Review, Vol.67(2), pp. 411-426.
- Butler, D., Holland, K., and Tippett, M. (1994) Economic and accounting (book) rates of return: Application of a statistical model. Accounting and Business Research Vol.24(96), pp. 303-318.
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