Return on Infrastructure Employed (ROIE)

Definition

The term return on infrastructure employed refers to a measure that allows the investor-analyst to understand the return a company is generating relative to the IT infrastructure it has deployed. Generally, companies have difficulty understanding the returns on their business cases for new technology investments.

Calculation

Return on Infrastructure Employed = Before Tax Profit / IT Operating Expenses

Where:

  • Information technology (IT) operating expenses include salaries, purchases of software and hardware, networks, and IT outsourcing expenses.
  • Before tax profit is used since IT departments have no control over the company's tax rate.

Explanation

Return on investment measures allow the investor-analyst to understand the company's ability to provide investors with an acceptable return on their money. This is usually assessed by examining metrics such as net worth, returns on equity or assets, earnings, economic value added, and dividends. Return on investment metrics provide analysts with a way to determine a fair price to pay for a share of common stock. One of the ways to understand return on investment is by measuring a company's return on assets employed.

Companies oftentimes have difficulty quantifying the benefit derived from their IT investments. One of the ways to determine how well these investments are performing is by calculating the company's return on infrastructure employed. This metric takes the company's before-tax profit and divides it by the total IT operating expenses. The metric should be tracked over time and used by the analyst with caution. For example, the metric assume a causal relationship between IT investments and improved profits while there may be other reasons profit increases. The metric may also be affected by amortization and depreciation rates on IT infrastructure.

Example

The CFO would like to better understand how well Company ABC's IT team is performing over the last three years. The company has made a number of IT investments based on some very positive business cases. The CFO had her analytical team pull the company's before-tax profit and the total IT operating expenses over the last three year so they could evaluate the trend on return on infrastructure employed. The table below was provided by her team:

  Year 1 Year 2 Year 3
Before Tax Profit $16,690,000 $17,685,000 $18,725,000
IT Operating Expenses $75,864,000 $68,019,000 $62,417,000
Return on Infrastructure Employed 22.0% 26.0% 30.0%

The CFO knew before tax profit was increasing over but she was impressed with IT's ability to lower their operating expenses during the same timeframe, leading to an increase in ROIE over the last three years.

Related Terms

return on operating assets, return on assets employed, tangible book value, book value per share