HOME

TheInfoList




Return on investment (ROI) or return on costs (ROC) is a ratio between
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
(over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments.Return On Investment – ROI
, Investopedia as accessed 8 January 2013
In economic terms, it is one way of relating profits to
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
invested.


Purpose

In business, the purpose of the return on investment (ROI) metric is to measure, per period, rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment. It is also used as an indicator to compare different investments within a portfolio. The investment with the largest ROI is usually prioritized, even though the spread of ROI over the time period of an investment should also be taken into account. Recently, the concept has also been applied to scientific funding agencies’ (e.g.,
National Science Foundation The National Science Foundation (NSF) is an independent agency of the United States government Independent or Independents may refer to: Arts, entertainment, and media Artist groups * Independents (artist group)The Independents were a group of ...

National Science Foundation
) investments in research of
open source hardware Open-source hardware (OSH) consists of physical artifacts of technology designed and offered by the open-design movement. Both free and open-source software (FOSS) and open-source hardware are created by this open-source culture movement and ...
and subsequent returns for direct digital replication. ROI and related metrics provide a snapshot of
profitability An economic profit is the difference between the revenue a has received from its outputs and the s of its inputs. Unlike an , an economic profit takes into account both a 's and costs, whereas an accounting profit only relates to the explici ...

profitability
, adjusted for the size of the investment assets tied up in the enterprise. ROI is often compared to expected (or required)
rates of return In finance, return is a Profit (accounting), profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest paym ...
on money invested. ROI is not time-adjusted (unlike e.g.
net present value The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ra ...
): most textbooks describe it with a "Year 0" investment and two to three years' income. Marketing decisions have an obvious potential connection to the numerator of ROI (profits), but these same decisions often influence assets’ usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected. For a marketing ROI percentage to be credible, the effects of the marketing program must be isolated from other influences when reported to executives. In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the "return on investment" metric very useful. Return on investment may be extended to terms other than financial gain. For example,
social return on investment Social return on investment (SROI) is a principles-based method for measuring extra-financial value (such as environmental or social value not currently reflected or involved in conventional financial accounts). It can be used by any entity to eva ...
(SROI) is a principles-based method for measuring extra-financial value (i.e., environmental and social value not currently reflected in conventional financial accounts) relative to resources invested. It can be used by any entity to evaluate the impact on
stakeholders Stakeholder may refer to: *Stakeholder (corporate), a group, corporate, organization, member, or system that affects or can be affected by an organization's actions *Project stakeholder, a person, group, or organization with an interest in a projec ...
, identify ways to improve performance and enhance the performance of investments.


Limitations with ROI usage

As a decision tool, it is simple to understand. The simplicity of the formula allows users to freely choose variables, e.g., length of the calculation time, whether overhead cost is included, or which factors are used to calculate income or cost components. The use of ROI as an indicator for prioritizing investment projects alone can be misleading since usually the ROI figure is not accompanied by an explanation of its make-up. ROI should be accompanied by the underlying data that forms the inputs, this is often in the format of a business case. For long-term investments, the need for a Net Present Value adjustment is great and without it the ROI is incorrect. Similar to
discounted cash flow In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
, a Discounted ROI should be used instead. One limitation associated with the traditional ROI calculation is that it does not fully "capture the short-term or long-term importance, value, or risks associated with natural and social capital" because it does not account for the environmental, social, and governance performance of an organization. Without a metric for measuring the short- and long-term environmental, social and governance performance of a firm, decision makers are planning for the future without considering the extent of the impacts associated with their decisions. One or more separate measures, aligned with relevant compliance functions, are frequently provided for this purpose.


Calculation

Return on investment can be calculated in different ways depending on the goal and application. The most comprehensive formula is: Return on investment (%) = (current value of investment if not exited yet or sold price of investment if exited + income from investment − initial investment and other expenses) / initial investment and other expenses x 100%. Example with a share of stock: You bought 1 share of stock for US$100 and paid a buying commission of US$5. Then over a year you received US$4 of dividends and sold the share 1 year after you bought it for US$200 paying a US$5 selling commission. Your ROI is the following: ROI = (200 + 4 - 100 - 5 - 5) / (100 + 5 + 5) x 100% = 85.45% As the duration of this investment is 1 year, this ROI is annual. For a single-period review, divide the return (net profit) by the resources that were committed (investment): :return on investment =
Net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
/ Investment :where: :Net income = gross profit − expenses. :investment = stock + + claims. or :return on investment = (gain from investment − cost of investment) / cost of investment or :return on investment = (revenue − cost of goods sold) / cost of goods sold or :return on investment = (net program benefits / program costs) x 100


Property

Complications in calculating ROI can arise when real property is refinanced, or a second
mortgage A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
is taken out. Interest on a second, or refinanced, loan may increase, and loan fees may be charged, both of which can reduce the ROI, when the new numbers are used in the ROI equation. There may also be an increase in maintenance costs and property taxes, and an increase in utility rates if the owner of a residential rental or commercial property pays these expenses. Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan.


Marketing investment

Marketing not only influences
net profit In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busines ...
s but also can affect investment levels too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions. According to a recent study, business partnerships with "micro-influencers" can bring a greater ROI than collaborations with big celebrities. RoA, RoNA, RoC, and RoIC, in particular, are similar measures with variations on how '
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...

investment
' is defined.Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). ''Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.'' Upper Saddle River, New Jersey: Pearson Education, Inc. . The
Marketing Accountability Standards Board (MASB) The Marketing Accountability Standards Board (MASB), authorized by the Marketing Accountability Foundation Marketing refers to activities a company undertakes to promote the buying or selling of a product, service, or good. It is one of the ...
endorses the definitions, purposes, and constructs of classes of measures that appear in ''Marketing Metrics'' as part of its ongoin
Common Language in Marketing Project
ROI is a popular metric for heads of marketing because of marketing budget allocation. Return on Investment helps identify marketing mix activities that should continue to be funded and which should be cut.


Return on integration (ROInt)

To address the lack of integration of the short and long term importance, value and risks associated with natural and social capital into the traditional ROI calculation, companies are valuing their environmental, social and governance (ESG) performance through an
integrated management Integration may refer to: Biology *Modular integration, where different parts in a module have a tendency to vary together *Multisensory integration *Path integration * Pre-integration complex, viral genetic material used to insert a viral genome ...
approach to reporting that expands ROI to Return on Integration. This allows companies to value their investments not just for their financial return but also the long term environmental and social return of their investments. By highlighting environmental, social and governance performance in reporting, decision makers have the opportunity to identify new areas for value creation that are not revealed through traditional financial reporting. The
social cost of carbon The social cost of carbon (SCC) is the marginal cost of the impacts caused by emitting one extra tonne of greenhouse gas ( carbon dioxide equivalent) at any point in time, inclusive of 'non-market' impacts on the environment and human health. Th ...
is one value that can be incorporated into Return on Integration calculations to encompass the damage to society from greenhouse gas emissions that result from an investment. This is an integrated approach to reporting that supports Integrated Bottom Line (IBL) decision making, which takes
triple bottom line The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as b ...
(TBL) a step further and combines financial, environmental and social performance reporting into one balance sheet. This approach provides decision makers with the insight to identify opportunities for value creation that promote growth and change within an organization.


See also

*
Bang for the buck Bang for the buck is an idiom An idiom is a phrase or expression that typically presents a figurative language, figurative, non-literal meaning (linguistic), meaning attached to the phrase; but some phrases become figurative idioms while retaining ...
*
Energy return on energy invested In energy economics Energy economics is a broad scientific subject area which includes topics related to supply and use of energy in societies. Due to diversity of issues and methods applied and shared with a number of academic disciplines, ...
*
Internal rate of return Internal rate of return (IRR) is a method of calculating an investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted wi ...
*
Marketing plan A marketing plan may be part of an overall business plan. Solid marketing strategy is the foundation of a well-written marketing plan so that goals may be achieved. While a marketing plan contains a list of actions, without a sound strategic found ...
*
Price–earnings ratio The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's Share capital, share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overva ...
*
Rate of profit In economics and finance, the profit rate is the relative Profit (accounting), profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Historical ...
*
Rate of return In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in t ...
(RoR), also known as 'rate of profit' or sometimes just 'return', is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested *
Return on assetsThe return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue. ROA can be computed as below: :\mathrm = \frac This number tells you what the company can do with what it has, ''i.e.'' how many dolla ...
(RoA) *
Return on brandThe return on brand (ROB) is an indicator used to measure brand management performance. It is an indicator of the effectiveness of brand use in terms of generating net income. In fact, it is a special case of return on assets (ROA). ROB is calculate ...
(ROB) *
Return on capital employed Return on capital employed is an accounting ratio used in finance, valuation, and accounting. It is a useful measure for comparing the relative profitability of companies after taking into account the amount of capital used.Fernandes, Nuno. Finance ...
(ROCE) *
Return on capital Return on capital (ROC), or return on invested capital (ROIC), is a ratio used in finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and ...
(RoC) *
Return on equity The return on equity (ROE) is a measure of the profitability of a business in relation to the equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, eq ...
(ROE) *
Return on invested capitalReturn on capital (ROC), or return on invested capital (ROIC), is a ratio used in finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and m ...
(RoIC) *
Return on marketing investment Return on marketing investment (ROMI) is the contribution to profit (accounting), profit attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) ...
(ROMI) is "the contribution attributable to marketing (net of
marketing spending Marketing spending is an organization's total expenditureExpenditure is an outflow of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar ...
), divided by the marketing 'invested' or risked * Return on modeling effort (ROME) *
Return on net assetsThe return on net assets (RONA) is a measure of financial performance of a company which takes the use of assets into account. Higher RONA means that the company is using its assets and working capital efficiently and effectively. RONA is used by inv ...
(RoNA) * ROI for information technology is used to evaluate applications portfolios and information systems * Time to value


References

{{reflist Investment Factor income distribution Yield (finance)