Return on Investment (ROI)

In the financial decisions, return on investment is powerful tool to evaluate the performance of any investment. Return on investment is the ratio which shows the relation of net profit with investment. Before, invest the money, investor should see the company’s rate of return. If we multiply return on investment with 100, we can calculate rate of return.

Formula of Return on Investment

Net Profit on investment can be calculated with  total revenue from investment minus total expenses for purchasing such investment. Large number of accounting software calculates return on investment automatically, if you have entered whole year's transactions of company.

Use Of Return on Investment (ROI)

1. If we want to take the decision of investment in one company’s one financial product, then we can use this metric

• By comparing two or more company’s ROI.
• By Comparing ROI of two or more financial products of Same Company.

2. ROI is also useful for deciding to invest in govt. securities or private securities because high rate of return on investment will increase the risk of investment. So, you can decide in whose securities, you have to invest.

3. Accountant can use ROI for analysis the financial position of company. They can compare it with return on assets or return on equity.

4. One of the method of capital budgeting is return on project is based on ROI. Company can decide to invest in one of best project by using ROI in selection of different projects.