return on investment

(noun)

One way of considering profits in relation to capital invested.

Related Terms

Examples of return on investment in the following topics:

  • Return on Investment

    • Return on investment (ROI) is one way of considering profits in relation to capital invested.
    • Return on investment (ROI) is one way of considering profits in relation to capital invested.
    • Return on assets (ROA), return on net assets (RONA), return on capital (ROC) and return on invested capital (ROIC) are similar measures with variations on how 'investment' is defined .
    • Return on investment = (gain from investment - cost of investment) / cost of investment
    • Return on assets (ROA), return on net assets (RONA), return on capital (ROC) and return on invested capital (ROIC) are similar measures with variations on how 'investment' is defined.

  • Payback, ROI and renewable energy

    • The long-term financial rewards of renewable energy cannot be understood without comprehending ‘payback' or return-on-investment (ROI), both of which measure profitability in relation to capital expenses.
    • The payback period of the €50,000 investment, which is based on the annual market cost of electricity if the switch to renewable energy had not been made (€10,000) is therefore 5 years (€10,000 x 5 years = €50,000).
    • ‘Return-on-investment' is usually expressed as a percentage, so it is 20% (of the original investment) per year.
    • Note that accountants typically like to see financial investment estimates in terms of ROI, while almost everyone else prefers to see the ‘payback' period of an investment in terms of months or years.
    • Again, the ultimate payoff isthat at the end of the payback period, the business receives free electricity (minus maintenance and disposal costs) which is why renewable energy can be a smart investment.

  • HR Metrics

    • It is suggested that the business world is focused on metrics in determining success.
    • HR thought so, based on overall company performance.
    • These are all measures that can be used to express the HR program or changes in terms of a relationship between its financial returns and costs.
    • Time to fill becomes time to productivity; turnover rate becomes turnover quality; training costs become training return on investment" (Schneider, 2006).
    • The financial results are measures to compare the cost against the return from HR.

  • Equity Finance

    • They can achieve these goals by selling shares in the company to the general public, through a sale on a stock exchange.
    • In finance, the cost of equity is the return, often expressed as a rate of return, a firm theoretically pays to its equity investors, (i.e., shareholders) to compensate for the risk they undertake by investing their capital.
    • Just as landlords seek rents on their property, capital providers seek returns on their funds, which must be commensurate with the risk undertaken.
    • They naturally require an extra reward as an incentive to place their capital in a riskier investment instead of a safer one.
    • If an investment's risk increases, capital providers demand higher returns or they will place their capital elsewhere.

  • Financial Leverage

    • In terms of investments, there exists accounting leverage, notional leverage, and economic leverage.
    • Financial leverage tries to estimate the percentage change in net income for a one percent change in operating income.
    • It is possible to over-leverage, which is incurring a huge debt by borrowing funds at a lower rate of interest and using the excess funds in high risk investments in order to maximize returns.
    • In short, while adding leverage to a given asset always adds risk, it is not the case that a levered company or investment is always riskier than an unlevered one.
    • In finance, the general practice is to borrow money to buy an asset with a higher return than the cost of borrowing.

  • The Imperative of Liquidity

    • Having cash on hand is a seemingly simple concept.
    • When an organization has an opportunity to fund, or a debt to pay, they need capital on hand (i.e. capital available now) to provide funding.
    • All investments of capital can be framed with three key attributes: average expected return, degree of risk, and overall liquidity.
    • The decision of how much cash to invest, and where to invest it, is therefore a key consideration when balancing accounts for an organization.
    • This chart shows some estimations of various types of capital investments, alongside their respective risk, return, and liquidity.

  • Commercial Banks

    • Commercial banks are financial institutions that focus on enabling the exchange of capital and currency via a variety of services.
    • When considering commercial banks, it's useful to understand that they act as an outlet for strategic financial decisions for businesses to offset certain risks, procure resources, invest, and store assets.
    • While banks offer other services in addition to these, the primary function of commercial banks is to act as a critical resource for businesses to access capital, enable investments, and mitigate risks.
    • Credit Risk – Risk that a borrower may not return the entirety of the payment owed.
    • Operational Risk – Risk that an operational issue will diminish returns.

  • The Role of Financial Managers

    • Financial managers perform data analysis and advise senior managers on profit-maximizing ideas.
    • They often work on teams, acting as business advisors to top executives.
    • Decisions are based on several inter-related criteria.
    • If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends).
    • Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

  • Joint Ventures

    • In a joint venture business model, two or more parties agree to invest time, equity, and effort for the development of a new shared project.
    • In this scenario, both parties are equally invested in the project in terms of money, time and effort to build on the original concept.
    • In short, both parties must be committed to focusing on the future of the partnership rather than just the immediate returns.
    • A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts.

  • Elements of economic globalization

    • International Trade: An increasing share of spending on goods and services is devoted to imports and an increasing share of what countries produce is sold as exports.
    • For example, China's economy is heavily dependent on the exportation of goods to the United States, and the United States customer base who will buy these products.
    • Direct investment in constructing production facilities, is distinguished from portfolio investment, which can take the form of short-term capital flows (e.g. loans), or long-term capital flows (e.g. bonds) (Stiglitz, 2003).
    • Since 1980, global flows of foreign direct investment have more than doubled relative to GDP (World Briefing Paper, 2001).
    • Migration can benefit developing economies when migrants who acquired education and know-how abroad return home to establish new enterprises.