Investment Accounting, Finance, SPSS Essay Research (Essay Sample)
Return on Investment
Return on Investment
Return on Investment (ROI), is a measurement of performance which is used in the evaluation of the efficiency of a particular investment or to compare the efficiency of two or more different investments. In simpler terms, ROI is a performance which is used as a direct measure of the return amount on a particular investment, relative to the initial cost of that particular investment. ROI is a value which can be calculated by taking the return, profit or rather benefit derived from the investment and dividing it by the initial cost of putting up that investment. ROI is expressed as a percentage or also as a ratio (Correa-Baena et al. 2018). Given the simplicity and versatility of ROI, it is termed to be a popular metric which can be essentially used as a rudimentary gauge of the profitability of an investment.
Investors and businessmen have recently manipulated ROI to fit their needs thus coming up with a new development of ROI metric which is known as Social Return on Investment, (SROI). SROI was first developed in the late 90s and it was used to account for all the broader impacts of investments through the use of extra- financial value.
Purpose of ROI
As earlier discussed, ROI is ration between the net profit (over a certain period) and the investment cost. In any investment, the higher the ROI value means that the investment is doing well and that the profits are high, the vice versa is also true where by a lover ROI value means that the investment is raking in losses. In economic terms, ROI is a way of relating profits to the capital invested.
In any business or project, ROI metric is used to measure and evaluate the return rates of the funds invested on the economic entity per period time, in order to determine whether or whether not to undertake that particular project or investment. In many are cases that it is also used as an indicator to compare different types of investments within a portfolio. In this case, the ROI with the highest value is taken to be the most successful and hence it is prioritized regardless of the period. A case example where this concept has been put into is in the scientific funding agencies’ for instance the ‘National Science Foundation’. Together with other relatable metrics, ROI provides a snapshot of the profitability of an investment, which is adjusted for the size of that particular investment assets tied up in the enterprise. Unlike net present value, ROI is not time adjusted, it is usually referred to with a year zero investment with two or more years of income.
ROI in learning and development
When coming up with marketing decisions, the numerator of ROI which happens to be the profits and benefits of that investment should have obvious connections to the decisions made. However, these same decisions that are agreed upon often have an influence to the usage of assets and the capital requirements of that particular investment. As a marketer or investor, understanding the position of your project becomes very important, likewise to knowing the expectations of your returns. As per the recent surveys which was carried out on two hundred of the senior managers in the marketing field, 77% of them confirmed that ‘Return on Investment’ metric is very important and of benefit (Godwin et al. 2017). As initially discussed that investors can manipulate the development of ROI metrics to other forms such as SROI, which are more than just financial gains. As earlier discussed, SROI can be used by any of the economic entity in the evaluation of the stakeholders’ impacts, identifying various ways to improve and enhance the performance of projects and investments.
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