Ratio analysis is one of the most crucial functions in financial management while focusing on efficient and

effective management of the fund. It compares two or more elements from the respective financial
statements in order to make a comparative analysis for the execution and implementation of financial
decisions. In other words, financial ratio analysis is the quantitative study of liquidity in order to determine
short-term and long-term solvency which represents financial performances. (Barnes, 1987). And it is
done by dividing one or more items of financial statements as numerators by one or more financial items
as denominators. Furthermore, it provides comparable values or results as the bases for interpretations.
Several financial ratios can be used for several purposes by stakeholders namely, liquidity, solvency,
profitability, turnover, and earnings ratios respectively. In addition to making predictions, ratio analysis
expounds deep insights into organizational performances in terms of profitability, stability, liquidity, and
efficiency. In short, ratio analysis provides financial reviews comparing trends, peer firm (P2P), and
industry. (Ross et al, 2019).
While talking about the return on investment (ROI) ratio in the financial and profit evaluation of the
organization, provides information regarding investment profitability for certain assets of the firm. It
evaluates whether an investment is effective or not while considering to obtain a certain portion of the
profit. ROI is a profitability ratio that is calculated by dividing net profit by the sum of long-term liability or
debt and shareholders’ equity or capital. In other words, it compares the cost of an investment and its
profitability or efficiency against an industry, trend, peer and benchmark. (Murdoch et al., 2007). ROI tells
us about how much profit can be possessed by injecting a certain amount of investment which can be
financed by capital and long-term loan or debt. And it is one of the widely used profitability ratios while
making an investment decision. For example, suppose an investor has invested $100 in a particular
investment which was financed fifty-fifty by capital and long-term debt and today the market value of that
investment is $150. And we can say that the investment is successful to generate 50 percent of profit {i.e.,
($150-$100)/100)}. From an investor perspective, higher profit will be preferable. There are several
factors that affect the investment return such as time, allocation of assets, selection of stock, risk factors,
opportunity cost, and so on. (Phillips & Phillips, 2010).
The significances/measurement of ROI are as below:
- It measures whether a monetary value of an investment is increased or decreased.
- Informs about the soundness of an investment. Degree of financial earnings.
- Provides the basis for comparison between or among investments while considering trends, P2P,
and industry that is the benchmark.
- Also, helps in measuring the success of an investment while comparing it with the initial outlay or
cost along with time period for the earnings of the profit.
- Helps in finding the strength to obtain the expected/required rate of return for the money invested by
shareholders or lenders while focusing on the utilization and management of that fund.
- To provide insights into management practices and tactics. (Ross et al., 2019).

Return on assets (ROA) is a profitability ratio that measures profit in terms of total assets.
Furthermore, it determines the efficiency of the assets along with how much profit has been generated
using the assets which is the feasibility of the company. In other words, ROA can be utilized in finding
operating efficiency while making profits as the basis for analysis that is generated by the way of effective
allocation of the total assets of the company. It can be calculated by dividing the net income/profit after
tax (NPAT) by the total assets of the balance sheet of a particular company. (Choiriyah et al., 2021). For
example, let’s suppose ABC company has an NPAT of $20 while it has a total assets value of $100. Then
ROA is 20 percent {i.e., ($20/$100)}. And higher ROA is preferred.

Similarities between ROI and ROA are as follows:

- These two ratios measure financial profitability to make insights into financial decision makings.
- Both ratios can be measured against the trend, P2P, and industry for better opportunities.
- Profits are the major basis to take into account.
- Higher ROI and ROA are preferred.

Major differences between ROI and ROA are as follows:

- ROI determines the profitability in terms of investment made whereas ROA determines the
profitability of the business organization against total or average total assets.
- ROI is the profitability ratio of investment more than the efficiency ratio of that ROA.
- ROI can be calculated by dividing NPAT by the capital employed whereas ROA can be calculated by
dividing net profit by total assets or average total assets (if information has been given).
- ROI indicates expected return to be generated by investment whereas ROA is the return to be
obtained using assets of the firm.
- ROA is used to analyze financial statements while ROI is used to analyze specific investment. (Ross
et al., 2019).

References
Barnes, P. (1987). The Analysis and Use of Financial Ratios: A Review Article. Journal of Business
Finance &Amp; Accounting,
14(4), 449–461. https://doi.org/10.1111/j.1468-5957.1987.tb00106.x
Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2021). The Effect Of Return On Assets, Return On
Equity, Net Profit Margin,
Earning Per Share, And Operating Profit Margin On Stock Prices Of Banking Companies In
Indonesia Stock Exchange.
International Journal of Finance Research, 1(2), 103–123. https://doi.org/10.47747/ijfr.v1i2.280
Murdoch, W., Polasky, S., Wilson, K. A., Possingham, H. P., Kareiva, P., & Shaw, R. (2007). Maximizing
return on investment in
conservation. Biological Conservation, 139(3–4), 375–
388. https://doi.org/10.1016/j.biocon.2007.07.011
Phillips, P. P., & Phillips, J. J. (2010). Return on Investment. Handbook of Improving Performance in the
Workplace: Volumes 1-
3, 823–846. https://doi.org/10.1002/9780470592663.ch53
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (13th Edition
ed.). McGraw Hill
Education.