Return on investment (ROI) is used to measure the value of an investment and its performance, usually over set periods of time. This is a comparison function in major investment management, using ROI as the benchmark for investment purposes.
ROI is also an important business concept, using the same principles to analyze business activities and identify performance issues in assets.
ABCD Inc has a portfolio of properties with net investments and returns as follows:
|123 Mockingbird Lane||$1,000,000||$90,000||9%|
|234 Pigeon Street||$1,000,000||$40,000||4%|
Obviously, one property is performing much better than the other. The decision will be made to either sell the underperforming property or to invest more to get better returns.
ROI Financial sector functions
ROI is particularly important in the financial sector, where returns are directly linked to the core business and financial obligations of investment firms. In this industry, performance and investments are inseparably linked. Investment strategies are focused on maximizing returns, so a similar process is used to buy and sell financial products to achieve that goal.
ROI for products and services
A slightly different method, but still based on returns, is used to evaluate products and services. These are assessed over time in terms of demand, as well as performance. At a certain point, a product or service becomes non-viable, and the emphasis in these cases is to minimize loss, as well as the return factors.
For businesses, the break even point is where the cost of the product or service, and often both, equals revenue. The ROI factor is based on a return above this point for viable products and services, and below it for non-viable.
Generally speaking a target percentile is created as a measure of performance. A product or service may be required to achieve ROI of 20%, for example, to be considered viable. Below this figure may result in cessation of the business activity.
Return on investment is an absolutely basic business strategic tool, intended to provide accurate assessment of real costs and values.