Return on investment is a percentage of return on the total capital employed in the business It provides an easily calculated & acceptable

measure of economic performance of the business It is an important means of measuring management success in profitably investing in companys assets It is very much used in investment decision making

Return on investment

ROI=(Operating profit/capital employed)*100 where, Capital employed=(share capital+ reserve surplus+ long term loans)(fictitious assets & non-business assets)

Calculated as

To measure operating performance of an organization To evaluate and control the capital expenditure project

To make profit planning

Uses

To analyze the profit by operating division To analyze the profit by product line

Pricing of new products

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ROI earned by an organization should be sufficient to provide a fair return to the shareholder It is also required for expansion of business under conditions of general economic growth It is also required for attracting new capital whenever required It is required to satisfy the employees & creditors for continued existence of the company

importance

R
O

By increasing sales By reducing costs

By reducing capital employed By increasing profit

By optimizing the product mix By maximizing the capacity utilization

Efforts to improve ROI

Manipulation

Different bases for computation

Emphasis on short term profits

limitations

Poor measure

Allocation of resources

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