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Thursday, May 3, 2012

Return On Investment



In business we measure a lot of things. One of the most common measures is Return on Investment or ROI. The simple idea is that we show how much profit is made (or lost) in comparison to how much was invested to begin with.

This can also be called Return on Assets (ROA)

Our redneck example:
If Billy-Bob invests $500 in a still and pays $100 for ingredients and supplies, then his total investment is $600.

If Billy-Bob is able to produce and sell 1,000 gallons of white lightning at $5 per bottle his total revenue is $5,000. Therefore his gain on investment is
$5,000-$600= $4,400.
Revenues – Investment =Amount of Return
We then take that $4,400 gain on investment and divide it by the cost of investment

$4,400/$600
Amount of Return / Investment expressed as a percentage
This gives us an ROI of 733%. Obviously this is unusually high but then Billy-Bob is an unusual fellow. A more real world ROI is 10 to 15%. But one will find ROIs of negative amounts and into unlimited positive features. 



Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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