ROI Financial and Non-Financial
ROI (Return on Investment)Return on investment is the most common method to evaluate the performance of an international firm. It shows the relationship between profit to invested capital and encompasses almost all important factors related to performance. An improved ROI can act as a logical motivator of the managers.
Budget as SuccessIndicator - budget is an accepted tool for measuring and controlling the operations. It is also used to forecast future operations. A budget is a clearly expressed set of objectives that guide the managers to set their individual performance standards. A good local or regional budget helps the company to facilitate its strategic planning process smoothly. Non-Financial Measures - The major non-financial measures that can be used to evaluate performance are:
- Market share
- Exchange variations
- Quality control
- Productivity improvement
- Percentage of Sale
The return on investment formula:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
BREAKING DOWN 'Return on Investment (ROI)The calculation itself is not too complicated, and it is relatively easy to interpret for its wide range of applications. If an investment’s ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help you eliminate or select the best options. Likewise, investors should avoid negative ROIs, which imply a net a loss.
For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2010 and sold his stock shares for a total of $1,200 one year later. To calculate his return on his investment, he would divide his profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%.
With this information, he could compare his investment in Slice Pizza with his other projects. Suppose Joe also invested $2,000 in Big-Sale Stores Inc. in 2011 and sold his shares for a total of $2,800 in 2014. The ROI on Joe’s holdings in Big-Sale would be $800/$2,000, or 40%.
Limitations of ROI
Examples like Joe's (above) reveal some limitations of using ROI, particularly when comparing investments. While the ROI of Joe’s second investment was twice that of his first investment, the time between Joe’s purchase and sale was one year for his first investment and three years for his second.
Joe could adjust the ROI of his multi-year investment accordingly. Since his total ROI was 40%, to obtain his average annual ROI, he could divide 40% by 3 to yield 13.33%. With this adjustment, it appears that although Joe’s second investment earned him more profit, his first investment was actually the more efficient choice.