Simple rate of return

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Simple rate of return

The return from investments figured by dividing income plus capital gains by the amount of capital invested. The effect of compounding is not taken into account.

Simple Rate of Return

An estimate of the return on an investment. It is calculated simply by finding the investment's profit before taxes and interest expenses. The simple rate of return is easy to calculate but is not always accurate because it considers the investment's profit rather than cash flow. It also does not take into account the effects of compounding. It is also called the accounting rate of return or the book value method.
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In accounting terms, what is discussed in the literature is a possible trade-off between accounting liquidity and profitability caused by the assumption that companies that carry more liquid assets would be less apt to generate greater accounting returns for shareholders (commonly defined as net income per unit of net equity, or return on equity, or simply ROE).
At managerial level, companies use summary measures of aggregate performance, using monetary terms such as profits, accounting returns and market returns, but none of these is perfect on its own.
Penman (2001) examined the relationship between interest rates and accounting returns and growth.
2005) also propose that accounting returns and market measures represent two distinct dimensions of firm performance.
In their paper the author found marginal evidence that accounting returns cause stock returns.
The evidence of volatile performance was less complete, but there was a strong indication that CEO narcissism was associated with large annual fluctuations in accounting returns (ROA).
It is important to note that these results are based on accounting returns where firms can take advantage of the tax incentives, such as dividend distributions policy, principal and interest deductions on ESOP loans, provided under ERISA rules.
The purpose of this paper is to investigate the impact of bank asset composition on accounting returns.
The pair-wise correlations in Table III suggest that firms with committee insiders have lower stock and accounting returns, more concentrated ownership structures, and pay their CEOs a lower salary.
The intent is to not focus on the pros or cons of relative return definitions, although strong accounting returns typically lead to good returns for shareholders.

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