Return On Investment
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.
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
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
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