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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Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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