Profitability by ROI
Return on investment, or ROI, is the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets. So if your net profit is Rs 100,000 and your total assets are Rs 300,000, your ROI would be .33 or 33 percent. ROI serves as a returns ratio, allowing a business owner to calculate how efficiently the company uses its total asset base to generate sales. Total assets include all current assets such as cash, inventory, and accounts receivable in addition to fixed assets such as the plant buildings and equipment. If an investment doesn't have a good ROI, or if an investor or business owner has other opportunities available with a higher ROI, then calculating the ROI values on the different opportunities can instruct them as to which investments to choose for the best return. Many analysts and investors like to use the ROI metric because of its versatility and simplicity. Essentially, it works as a quick gauge of an investment’s profitability, and it's very easy to calculate and interpret for a wide variety of investment types.
Return on investment = (revenue − cost of goods sold) / cost of goods sold