Return on Investment (ROI): Meaning, Formula, Importance & Calculation (original) (raw)

Last Updated : 25 Apr, 2026

Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures how much profit or loss is generated relative to the cost of the investment.

ROI=\frac{Net~Profit~or~Return~on~Investment}{Cost~of~Investment~or~Capital~Employed}\times100

ROI is expressed as a percentage, making it easy to compare different investment opportunities. However, it does not consider the time period of the investment.

Importance of ROI

ROI is widely used for decision-making and performance evaluation. Its key benefits include:

• **Investment Comparison: Helps compare returns from different investment options
• **Better Decision-Making: Assists in selecting the most profitable opportunities
• **Efficient Resource Allocation: Ensures optimal use of funds
• **Pricing Strategy: Supports setting product prices for maximum profitability
• **Investor Confidence: Builds trust among investors and stakeholders
• **Risk Analysis: Helps identify potential risks and returns
• **Strategic Planning: Guides long-term financial planning and growth

ROI in Financial Analysis

• ROI is part of profitability ratios, which help assess how efficiently a business uses its resources to generate profit.
• The Statement of Profit and Loss plays a key role in calculating ROI, as it provides the necessary data on earnings and expenses.

**Note: ROI is often confused with Return on Capital Employed (ROCE), but they are not exactly the same. ROCE is a more specific profitability ratio focusing on capital efficiency.

Illustration 1:

Calculate Return on Investment from the following information:

**Solution:

**Step 1: Calculate Capital Employed

Capital Employed = Non-current Assets + Current Assets − Current Liabilities
= 1,50,000 + 80,000 − 54,000
= ₹1,76,000

**Step 2: Apply ROI Formula

Return~on~Investment=\frac{Net~Profit~Before~Interest~\&~Tax}{Capital~Employed}\times100

Return~on~Investment=\frac{29,000}{1,76,000}\times100

**Return on Investment = 16.47%

Illustration 2:

Calculate Return on Investment from the following information:

The net profit after tax is ₹1,00,000, and the amount of Tax is ₹20,000.

Solution:

Return~on~Investment=\frac{Net~Profit~Before~Interest~\&~Tax}{Capital~Employed}\times100

Profit before interest and tax = 1,00,000 + Debenture Interest + Tax

= 1,00,000 + 60,000 + 20,000

= ₹1,80,000

Capital Employed = Equity Share Capital + Preference Share Capital + Reserves + Debentures

= 5,00,000 + 1,50,000 + 2,00,000 + 3,00,000

= ₹11,50,000

Return~on~Investment=\frac{Net~Profit~Before~Interest~\&~Tax}{Capital~Employed}\times100

Return~on~Investment=\frac{1,80,000}{11,50,000}\times100

**Return on Investment = 15.65%