Return on Investment (ROI) is a measure which is used to analyze the efficiency of an investment alternative used by the firm.
It is calculates using the simple formula:
ROI = Net profit / Investment * 100
But this is not applicable to all kinds of businesses. Business with complex terms will have different ways of deriving ROI.
Some of the considerations while using ROI:
- The managers must recognize total profits and the total costs invested in achieving the same.
- The firm must have a list of measures which are considered while calculating the same. These measures have to be communicated to all the disciplines of the firm.
- ROI is calculated for a specific period of time and the departments must be aware of the time-frames.
If the ROI is 0% it means the firm is at a breakeven point. To state it in simpler terms the company has neither gained anything nor lost anything. If the ROI is 100% it means that the business has made double profits. If the company has negative percentage then it means it has incurred a loss.
- Helps is ascertaining asset purchasing decisions.
- Aids the managers to identify the potentiality of new projects and trainings.
- Business decision making.
Get more definitions about Return on investment and other ERP related terms here.