Return on Investment (ROI) is an idea in finance that measures the investment’s profitability. There are a variety of methods to calculate ROI, however the most popular is to divide the net profit by the assets total. In the example above, if gross profit was $50,000 and your assets total at least $200,000 then the ROI will equal 25 percent.
The most common description of ROI would be “a profitability measure that evaluates the performance of a business by dividing net profit by net worth.”
For small-sized businesses, the use of ROI could include assessing the performance of pricing strategies as well as the purchase of capital equipment or an inventory investment. When you purchase assets for the business sector, like equipment or inventory and equipment, you are hoping to gain an income by the acquisition.
Return on investment is a method to assist you in making a decision between different options for purchasing that can either bring in income or bring about savings in costs that will benefit the profits of the company. Investors also consider the return on investment when making a decision on the best way to fund a business venture.
Return on investment could be assessed in a different way for example, in terms of social responsibility, or social and environmental benefits. It is harder to quantify. To determine the social ROI on investment, the return on investment will need to be measured to determine the price in comparison to the value. A group of experts was created in 2006 in order to assist in the process of calculating the social returns on investment.
Although the return on investment can be an effective tool for looking at the profitability of a business, calculations are made more complicated by other variables like time as well as the cost of maintenance, financing costs, and other considerations for investment and the general goals of the business.
For example, when you acquisition of equipment for capital it is anticipated that the equipment will benefit the business for many years. This means that the net profit will have to be calculated for the upcoming time intervals to calculate the total ROI. Furthermore, maintenance costs throughout the life of the equipment could decrease the overall ROI. A professional accountant can help in formulating more intricate ROI calculations.