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.

Advantages:

  • 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.

   

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