Return On Investment

Knowledge Center

12manage is looking for students / contributors...


Determining of accounting value. Explanation of Return on Investment.


  1. Summary
  2. Forum
  3. Best Practices
  4. Expert Tips
  5. Resources
  6. Print

What is Return on Investment? Description

ROI is an accounting valuation method. The ROI is a return ratio that compares the net benefits of a project, versus its total costs. For example, if a project has an ROI of 300%, the net benefits derived from that project are three times those of the expected total costs to implement the project. As such, the ROI calculation represents the relative value of the project's cumulative net benefits (benefits minus costs) over the analysis period, divided by the project's cumulative total costs, and expressed as a percentage.

Because the numerator (Net Income) is an unreliable corporate performance measurement, the outcome of the formula for ROI must also be unreliable to determine success or corporate value. However the ROI formula still shows up in many annual reports...

Return on Investment overstates economic value

The degree to which ROI overstates the economic value depends on at least 5 factors.

  1. Length of project life. If this is longer, the overstatement will be bigger.
  2. Capitalization policy. If the fraction of total investment capitalized in the books is smaller, the overstatement will be bigger.
  3. Rate at which depreciation is taken in the books. Depreciation rates that are faster than straight-line basis will result in a higher ROI.
  4. Lag between investment outlays and earning back these outlays from cash inflows. If the time lag is greater, the degree of overstatement will also be greater.
  5. Growth rate of new investment. Fast growing companies will have lower Return On Investment.

Calculation of Return on Investment. Formula

Net Income / Book Value of Assets = ROI

A better alternative is:

Net Income+Interest (1-Tax Rate) / Book value of Assets = ROI

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide -

Book: Ciaran Walsh - Key Management Ratios -

Return On Investment Forum
  Return on Investment Calculation for Equipment Replacement
How to calculate payback period when a company is ...
  ROI of Dealing with Absenteeism
I would like to get a formula to calculate the ROI...

Return On Investment Special Interest Group

Special Interest Group

Return On Investment Education & Events

Find Trainings, Seminars and Events

Best Practices - Return On Investment Premium

Expert Tips - Return On Investment Premium

Resources - Return On Investment Premium

Analyzing Financial FeasibilitySign up

Presentation about Feasibility Studies in the Fina...
Usage (application): Financial Feasibility Analysis, Project Selection, ROI, NPV, IRR

Yield and Bond Price CalculatorSign up

Calculates yield to maturity for bonds....
Usage (application): Yield Calculation, Bond Price Calculation

Conservatism, Growth and ROISign up

Paper by Madhav V. Rajan, Stefan J. Reichelstein a...
Usage (application): Return on Investment analysis

News about Roi MethodSign up


News about Roi RatioSign up


Videos about Roi MethodSign up


Videos about Roi RatioSign up


Presentations about Roi MethodSign up


Presentations about Roi RatioSign up


Books about Roi MethodSign up


Books about Roi RatioSign up


More about Roi MethodSign up


More about Roi RatioSign up


Compare with Return on Investment:  EBIT  |  EBITDA  |  Total Cost of Ownership  |  Relative Value of Growth  |  Economic Value Added  |  Earnings Per Share  |  Return on Equity  |  Net Present Value  |  Return On Net Assets  |  Return on Invested Capital  |  CAGR

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

More Management Methods, Models and Theory

Special Interest Group Leader

You here

About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2018 12manage - The Executive Fast Track. V14.1 - Last updated: 17-8-2018. All names ™ of their owners.