Return on Investment
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 .
Assets
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.
Marketing not only influences net profits but also can affect investment levels too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions.
In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the "return on investment" metric very useful.
Purpose
The purpose of the "return on investment" metric is to measure per-period rates of return on dollars invested in an economic entity. ROI and related metrics (ROA, ROC, RONA and ROIC) provide a snapshot of profitability adjusted for the size of the investment assets tied up in the enterprise. Marketing decisions have obvious potential connection to the numerator of ROI (profits), but these same decisions often influence asset usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected. ROI is often compared to expected (or required) rates of return on dollars invested.
Construction
For a single-period review, just divide the return (net profit) by the resources that were committed (investment):
Return on investment (%) = Net profit ($) / Investment ($) × 100
or
Return on investment = (gain from investment - cost of investment) / cost of investment
Problems in Calculating ROI
Complications in calculating ROI can occur when a real estate property is refinanced, or a second mortgage is taken out. For example, interest on a second (or refinanced) loan may increase or loan fees may be charged. Both of these factors can reduce the ROI when the new numbers are used in the ROI equation. There may also be an increase in maintenance costs and property taxes, or an increase in utility rates if the owner of a residential rental or commercial property pays these expenses.
Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan. (To know more about ARM, check out: Mortgages: Fixed-Rate Versus Adjustable-Rate. )