ROI, abbreviation of Return on Investment is possibly one of the oldest concepts of finance management. Incidentally, it is still one of the key parameters considered by many finance experts. While there are other kids like ROE, ROCE and ROGIC on the block, ROI still remains the first semester chapter of any MBA finance program.
ROI tries to inform the business owner on one major front – benefits (returns) accrued from the investments (costs). Consider a small business owner whose cost of investment is $100 in his small business. He has gained $200 for the first year. Thus the ROI will be 100% for this small business. ROI is computed with the help of this formula – Difference between gain and cost of investment divided by cost of investment.
Some financial experts assert that ROI doesn’t depict the correct financial health of the business. While this is true to a lot extent, but ROI offers two major advantages – ease of calculating and understanding and fairly reasonable picture of returns from business particularly in competitive scenario.