Definition of 'Return On Investment - ROI
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:
In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
Investopedia explains 'Return On Investment - ROI'
Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.
A variation of this ratio is return on average capital employed (ROACE).
A ratio that indicates the efficiency and profitability of a company's capital investments. otherwise any increase in borrowing will reduce shareholders' earnings.Definition of 'Return On Capital Employed . Calculated as:
Investopedia explains 'Return On Capital Employed ROCE'
ROCE should always be higher than the rate at which the company borrows. which takes the average of opening and closing capital employed for the time period.
The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. Both of these types of financing are used to fund the operations of the company. it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. Based on this example. Sometimes this is referred to as "return on investment". ROA is displayed as a percentage. For example. The assets of the company are comprised of both debt and equity. Calculated by dividing a company's annual earnings by its total assets. ROA for public companies can vary substantially and will be highly dependent on the industry. management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem. The higher the ROA number. The formula for return on assets is:
Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.ROA'
An indicator of how profitable a company is relative to its total assets. if one company has a net income of $1 million and total assets of $5 million.
Investopedia explains 'Return On Assets . the first company is better at converting its investment into profit. if another company earns the same amount but has total assets of $10 million.Definition of 'Return On Assets . ROA gives an idea as to how efficient management is at using its assets to generate earnings.ROA'
ROA tells you what earnings were generated from invested capital (assets). however. because the company is earning more money on less investment. but very few managers excel at making large profits with little investment.
. the better. When you really think about it. its ROA is 20%. it has an ROA of 10%. This is why when using ROA as a comparative measure.