UK Accounting Glossary
corporate finance The amount, expressed as a percentage, that is earned on a company’s total capital calculated by dividing the total capital into earnings before interest, taxes, or dividends are paid.
OI is expressed as a percentage or a ratio. ROI is popular because of its versatility and simplicity and may be modified for different situations.
In different contexts, ROI takes several meanings. ROI for a company can be one way to measure of the effectiveness of management, a measure of profits, of cost savings, or of a company’s ability to earn using its assets (in this case, ROI is calculated as net after-tax profits divided by total assets). ROI may also be used in justifying a project or proposal, based on projected profits from the project and its estimated costs. Sometimes ROI is used to measure returns from efforts to gain market share, enter new markets, or develop infrastructure; in these cases, ROI may be used to measure how effectively an objective was met.
By comparing the ROI of different potential projects, a determination on which project to undertake may be made. Also, if an investment does not have a positive ROI or other investments have higher ROI, the investment should not be made. If not careful, ROI calculations may be manipulated to suit the needs of the user, or project manager.
The ad campaign cost over two thousand dollars but generated only five hundred dollars in new sales, so there was not a good return on investment.
The budget office spent two months studying the return on investment figures from similar projects before sending their recommendations to the Board.
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This glossary post was last updated: 6th February 2020.