Return On Investment (ROI) and Its Contribution to Investment Performance

When determining the profitability of an investment, organizations use the Return on Investment (ROI) formula. ROI is a performance indicator that determines the profitability of any investment (Zamfir, Manea, and Ionescu 2).

For many years, organizations have calculated the Return On Investment (ROI) before any venture in their business. Some managers critic the ROI model because it can easily be manipulated and cannot be used to compare investment projects in different economic situations (Zamfir, Manea and Ionescu 3).

Other managers and investors consider it the main factor in decision-making.  Even though some people oppose ROI because it is easy to calculate, it is a mainly used indicator of future investments and acquisition decisions. It should not be used as the only factor because it does not consider the asset’s depreciation or the time value of money.

ROI’s contribution to investment performance

Return on investment (ROI) is calculated by subtracting the profit of the investment from the cost and then dividing the cost. The result is then multiplied by 100, giving the Return On Investment (ROI) in percentage.

According to an article by Zamfir, Manea, and Ionescu (2), ROI can be used in all types of investments, before and after investing. ROI provides insight to investors on the profitability of different investments.

When it is calculated, it produces a positive or negative value. The negative value shows that the investment is unprofitable (Zamfir, Manea and Ionescu 3). ROI enables investors to decide on whether to invest in a business or not. Though the calculations do not consider inflation or investment risk, it helps calculate both long and short-term investments.

Example of calculation:

An investor invests 20,000 in a startup marketing company. After some time, the investment was 24,000. The ROI of the investment is:

ROI = [(Profit – Cost)/cost] *100

ROI = [(24,000-20,000)/20,000] * 100 = 20%

Is it acceptable to lose profit on one product if that product is vital to the sale of an extremely profitable product? 

Yes, it is okay. When using the loss leader strategy, the unprofitable product attracts new customers to the profitable product. The loss leader strategy is a pricing technique of selling a product at an unprofitable cost to attract new customers or sell more Other Financial Metrics Measures besides ROI

There are other financial metrics besides Return on Investments. They are all used to calculate total investment returns, just like ROI. The formulas of each metric are different.

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