What does return on investment mean?

As a CEO, sales manager, or marketing manager, you've probably heard the term return on investment (ROI). The ROI gives you an important indicator of how successful an investment was or how much profit a company is generating. But what exactly does ROI actually mean and how is it calculated? In this blog post, we'll go over everything you need to know about ROI and how you can use it as a measure of your company's success.

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What is ROI?

Return on investment is a key figure that represents the relationship between the costs of an investment and the profit generated from it. It is the measurement that is used to determine whether an investment was profitable or not. Most companies use ROI as a measure of the success or failure of investment decisions.

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How is ROI calculated?

To calculate ROI, you must divide the profit (or benefit) of the investment minus all costs of the investment through the use. The formula is: ROI = (profit-costs)/costs. Imagine that you invest in a new product and your investment costs a total of €100,000. At the end of the year, you have a net profit of €125,000. Your ROI will therefore be (125,000 - 100,000)/100,000 = 0.25 or 25%.

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How can ROI be used as a key figure?

ROI can be used as a key figure for decision-making. If you have multiple investment options, you can use the ROI ratio to determine which option is the most profitable. ROI can also be used to make comparisons between different investments and to assess their profitability.

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What are the limits of ROI?

While ROI is an important metric, there are also some limitations. One of the biggest limitations of ROI is that it can only be applied to quantifiable investments. Another drawback is that it only assesses the quantitative value of investments and there is no feedback on how the investment has affected employees, customers, or other parts of the company.

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Other key figures for valuing investments

In addition to ROI, there are also other indicators that can be used when evaluating investments. Some of these include return on assets (ROA), profit before tax (EBT), or cash flow. These indicators can be used to get a more complete picture of investments and their success or failure.

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conclusion

ROI can be used when making investment selection decisions and comparing investment options. However, there are also limits to ROI, as it can only be applied to quantifiable investments and there is no feedback on how the investment has affected the company. Other indicators such as ROA, EBT or cash flow can also be used to get a more complete picture of investment decisions. Overall, however, ROI is an important metric that plays a role in assessing the profitability of corporate investments.

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