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Return on Investment

In finance and accounting ROI (Return on Investment )is also called as rate of return or ROR or sometimes it is called simply as return, is the ratio of the amount gained or lost (whether unrealized or realized) on an investment comparative to the amount of cash or money invested.  The amount of money lost or gained might be called as profit and loss, interest, net income and loss or gain and loss. The money invested may be called as principle, capital, asset or the cost basis of the investment. Return on Investment is generally expressed as percentage.

Return on investments shows how well a company uses its assets to generate profits.

Return on Investments = total assets turnover x net profit margin.

The DuPont formula is often used to determine the rate of return on investment. The DuPont method allows the firm to break down its rate on investments into two parts such as a profit on sales and an indicator of efficient asset use. Typically a low net profit margin (NPM) means a high total asset turnover (TAT) the significance of the relation ship between the NPM and TAT, however largely dependent on the industry.

Traditionally, the most common performance measures that take into account both operating income and the assets invested to earn that income is Rate on Investment (ROI)

Rate on Investments is calculated as follows:

Return on investments (ROI) = operating income/ assets invested.

In this formula assets invested is the average of the beginning and ending assets balances of the period. Properly measuring the income and the assets specifically controlled by a manager is critical to the quality of this performance measure. Using ROI, it is possible to evaluate the manager of any investment center, whether it is an entire company or a unit within a company, such as subsidiary, division or other business segment.

Questionnaire:

  • What is ROI?
  • Give the formula for computing ROI?



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