Menu
Return on investment (ROI) is a key concept in the world of corporate finance. This indicator serves as a benchmark for the profitability of investments and plays a decisive role in strategic decisions made by companies. ROI provides information on how effectively capital is utilised and what return is achieved on it.
ROI is a ratio that measures the relationship between the profit or benefit of an investment and the cost of that investment. In mathematical terms, ROI is expressed by the formula ROI=(profit-cost)/cost. A positive result means that the investment is profitable.
ROI is crucial to evaluate the profitability of projects, marketing campaigns or other entrepreneurial activities. Companies use ROI to make informed decisions about future investments. A high ROI indicates that an investment has been efficient and positive results have been achieved.
For a successful business, the ROI should be above the cost of capital. This means that the return exceeds the cost of capital employed. For example, an ROI of 10% means that for every euro invested, a profit of 10 cents is generated.
Let’s assume a company invests 10,000 euros in a marketing campaign and realises an additional profit of 20,000 euros. The ROI is then (20,000-10,000)/10,000=1 or 100%. This shows that the marketing campaign has generated twice as much profit as the costs invested.
In contrast, an investment of €15,000 in a new product development project could only generate a profit of €10,000. In this case, the ROI would be (10,000-15,000)/15,000=-0.33 or -33%. A negative ROI indicates that the investment was not profitable.
ROI is an indispensable tool for companies to evaluate the efficiency of investments and make the right strategic decisions. A positive ROI is the key to profitable and sustainable business success. Companies should therefore constantly analyse and optimise their investments in order to maximise their financial performance.
Image credi8ts: Header- & Featured image from Freepik
