ROI and Investment Performance

ROI and Investment Performance

According to Brewer et al. (2020), ROI is computed by dividing a business’ net operating income by the average operating assets. ROI can give insight into the financial performance of a business because a high return on investment indicates that the business has earned a lot of profit. ROI can also give insight into whether a product meets the required quality specifications and help a business or organization determine an investment’s efficiency (Thusini et al., 2022). However, ROI cannot give an accurate picture of the performance of an investment. According to Silvius (2012), calculating ROI cannot help businesses capture every element of value. Therefore, organizations can consider other measures besides ROI or combine the use of ROI and other measures to analyze solutions to business opportunities and problems.

One of the measures that organizations can use is Return on Assets. Return on Assets focuses on determining a company’s profitability based on its assets (Park, 2018). Organizations can use Return on Assets to determine whether they are using their assets efficiently to make a profit. The second measure is Return on Capital. Return on Capital can be used to analyze a business problem and opportunities by providing insight into the organization’s value-creating and profitability potential relative to the money invested by stakeholders.

Further, the profitability of different products in a company’s product line may vary based on the demand for each product. The popularity of a specific product in the product line may also boost the sales of another product. Therefore, losing profit on one product is acceptable if it is vital to selling an extremely profitable product because the profits generated by the extremely profitable product increase the overall return on investment. Losing profit over one product to promote the sale of an extremely profitable product is also acceptable because the unprofitable product increases the value of the extremely profitable product, leading to increased profitability.

References

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2020). Introduction to managerial accounting. McGraw-Hill.

Park, C. (2018). The effects of ROA (return on operating assets) and ROA (Return on investment assets) on the assets structure. Review of Accounting and Policy Studies, 23(4), 181–205. https://doi.org/10.21737/raps.2018.11.23.4.181

Silvius, A. J. (2012). Does ROI matter? Insights into the true business value of it. The Electronic Journal Information Systems Evaluation, 9(2), 93–104.

Thusini, S., Milenova, M., Nahabedian, N., Grey, B., Soukup, T., Chua, K.-C., & Henderson, C. (2022). The development of the concept of return-on-investment from large-scale quality improvement programs in Healthcare: An integrative systematic literature review. BMC Health Services Research, 22(1). https://doi.org/10.1186/s12913-022-08832-3

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Unit 7 DiscussionUnit 7 Discussion
What insight does ROI give into investment performance? Is it acceptable to lose profit on one product if that product is vital to the sale of an extremely profitable product? Why?

As you think about these questions, also consider what other measures beside ROI might be help in analyzing solutions to business problems – or opportunities.