The Return On Investment (ROI) is a ratio that measures the company's operating profitability in relation to the total assets used (i.e. net of financial, extra-fiscal, extraordinary and fiscal management). In other words it measures the return (return) of the total capital invested in the company to run its business activity and up to a certain extend the degree of competitiveness of a company.

The Return On Investment is an important indicator because it allows evaluate the profit You will earn if You invest in the company busines. It is an indicator of the financial well-being of a company and it reveals the efficiency of the overall operating activity of the management. 

DU PONT FORMULA

The ROI cn be broken down into two important factors: the profit margin ratio and the asset turnover ratio.

ROI = Net Profit after Taxes / Total Assets 

ROI = (Net Profit after Taxes / Sales) x (Sales / Total assets) 

This formula shows that the break-down of the Return On Investment is based on the thesis that company profitability is directly related to management's ability to manage assets efficiently and to control expenses effectively. In fact the Net Profit Margin (percentage of profit earned on sales) is a measure of profitability and the Total Assets turnover measures how well a company manages its assets. 

By using the ROI with the Du Pont formula the management can gain a great deal of insight into how to improve profitability and therefore improve investment strategy. The main advantages coming from the ROI break-down are therefore in the importance of turnover os a key driver for the overall profitability in fact turnover is just  as important as profit margin in enheancing overall return. It recognise the importance of sales and it stresses the possibility of trading margin for turnover in an attempt to improve the performance of the company. In other words a low turnover of assets can be made up by a high margin and vice versa. 

 

FACTORS INFLUENCING RETURN ON INVESTMENTS: 

Main factors influencing the Return On Investments are therefore "margin" and "turnover". So that for profit improvement, the copany's management can take various actions to enheance the ROI like improving margin, improving turnover or improve both. Generally improving margin can be achieved by reducing expenses, raising selling price or increasing sales faster than expenses. Improving turnover can be achieved by increasing sales while holding the company's investment relatively constant or by reducing assets. 

To conclude the factors are Cost of Goods Sold (COGS), General Costs that impact on the total cost and Selling Price. And also, Acounts receivable, Inventories and other assets included in the total assets book value (current assets and fixed assets). 

 

IS THERE AN OPTIMAL ROI ? 

There is no one ROI that can be considered satisfactory for a company. Even if the success of the operations comes from the optimum combination of profit, sales, and capital employed, the precise combination necessarely varies  with the nature of the business and te characteristic of the product. As a fact of the matter an Industry may have different tailored customers specification and dynamics with different margins and turnover ratios. 

 

ROI DEEP ANALYSIS: 

A deep analysis conducted on the ROI can reveal strenghts and weaknesses of the company business and its segments, and, it can give a detailed path over what needs to be done to improve performance and profitability.

High variability of ROI could lead lenders and banks to adopt prudent behaviour towards the company, which, despite having good economic margins, has a significant debt ratio. The ROI must always be compared with the company's ROD for the purpose of a deep profitability analysis that considers the structural dynamics of the company as a whole.

 

 

 

 

 

Studio Lupini srl
Via Don Rosmini, 4
21052 Busto Arsizio (VA) IT
MAIL: info@studiolupini.it
VAT:  IT 03611190129
Image
Image
Image
Amazon PayPal
Image
GENERAL INFORMATIONS
EUROPEAN PRIVACY POLICY