Meaning of Return on Investment
ROI is a tool used by investors to evaluate investment performance and compare profitability. It helps companies assess different investment scenarios and measure the profitability of their business based on investments made.
Advantages of Return on Investment
There are several advantages a return on investment can have in the financial health and outcome of the company:
Net income and investments indicate divisional profitability and help ensure assets are acquired based on the organization's return policy.
ROI aids in comparing profitability and asset utilization across business units and can be used for inter-firm comparisons within the same size and industry. It is valuable as it can be compared with the cost of capital to select optimal investment opportunities.
Another benefit of using an ROI for investment decisions is that it is simple but effective. The ROI calculation is one of the most simple calculations in financial ratios. There is no possibility of misinterpretation in ROI calculation because it has the same meaning in all contexts.