Return on Investment Ratio Analysis

Return on Investment (ROI) is a financial ratio used to evaluate the efficiency of an investment or to evaluate how efficiently the firm uses every dollar invested in assets.

Formula:
Return on Investment = (Gain - Cost of investment) / Cost of investment
Or,
ROI = Net Profit After Taxes / Total Assets
Or,
ROI = Net Profit Margin * Total Asset Turnover

Example 1:
If a company has total assets of $1,000,000 and net profit after taxes of $200,00. Then, the ROI would be: 200,000 / 1,000,000 = 20%

Example 2:
Thames Ltd has the following data:
Net Profit After Taxes $80,000
Sales $140,000
Fixed Assets $220,000
Current Assets $30,000
Calculate the Return on Investment.

Solution:
Total assets = 220,000 + 30,000 = $250,000
Net Profit Margin = Net Profit After Taxes / Sales = 80,000 / 140,000 = 57.14%
Total Asset Turnover = Sales / Total Assets = 140,000 / 250,000 = 0.56
ROI = Net Profit Margin * Total Asset Turnover = 57.14% * 0.56 = 32%

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