Return on Investment
Return on investment (R.o.I), also referred to as the rate of return (R.o.R), is one of the common ratios used to determine the level of profitability. An investor is a risk taker. As a reward for taking risk, an entrepreneur demands a return. Generally speaking, the higher the R.o.I the more profitable the venture is; however, the riskier it may be and vice versa.Return on Investment: Definition
R.o.I Is a performance ratio used to find out the level of return from a particular venture. A financier may have more than 10 businesses on their table all needing capital injections. Such an investor may not have time to visit all 10 ventures to scrutinize how much profit could be gained from each. This simple ratio, R.o.I, when well calculated would make such a decision much easier.
Why R.o.I is not same as Profit
This ratio is often confused with profit. However, the two are different. For one, while R.o.I is expressed as ratio or percentage, profit is calculated in actual currency. The formula below is used to calculate the rate of returns:
R.o.I = (Gain on investment –Cost of Investment)/cost of Investment
The formula above is very broad and covers several as aspects of a business. The good thing about this ratio is that it can be modified to capture the uniqueness and size of different venture and still be accurate. If a small business made net profit of about $100,000 and has its total assets valued at $300000, then its R.o.I would be 33%. Consequently, an investor putting in about $10,000 in such a business would expect $ 3,300 as a reward for their investment.
Its Importance in Making Decisions
As mentioned above the ratio is used to determine if a venture is worth investing in. In addition, it is used to tell how well a company is utilizing the resources at its disposal. The generally accepted R.O.I for big companies is 10%- 14 %. If management is not able to maintain this ratio at the predetermined level (especially is too low), then arguments can be made for it to be kicked out or be reshuffled.
A high rate of return is attractive to investors. On the other hand, it could mean the business is less capitalized. With low rate of returns, the business may not be able to finance its future expansion plans.
Benefits to Sewer Contractor
Understanding how to calculate and maintain a healthy rate of returns ratio will help a sewer contractor attract capital from various financiers to fund expansion. It also helps the contractor decide how well the company is being managed and thus make necessary changes. Moreover, it will guide the sewer contractor to know where most of the business's profit is coming from and hence inject more funds for more profits.
As you can see, the return on investment ratio is useful in determining investment options. However, you need to learn about it or have it calculated by an accountant who specializes in your business. This way, you would be sure the formulas chosen will bring out the truth about your business.
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