Return on investments (ROI)
Return on investments (ROI) is a financial indicator that evaluates the effectiveness of investments. This indicator is the ratio of net profit / loss to investments made in the enterprise and is usually expressed as a percentage. If the return on investment is < 100%, then this means that the investment is not returned. Therefore, when evaluating this indicator, it is necessary to look for it to be > 100%, which indicates that the investments made are successful.
This indicator is calculated as follows
Return on investment = ((Current investment value - Investment value at the time of investment) / Investment value at the time of investment) * 100% , where the difference between the current investment value and the Investment value at the time of investment represents net profit.
Among the advantages of this indicator there can be distinguished that it is quite simple in calculations and understandable in the interpretation of the final values. However, it does not take into account interest, taxes and other payments, which may slightly distort the final value, and it is the actual profit that is used in the calculation, that is, it is impossible to assess the effectiveness of investments in the future.
Also, when calculating, it should be noted for what period the net profit is taken, since this can have a decisive role in evaluating the effectiveness of two different investments.