What Is Return On Investment

Return on investment is the amount of profits gained by the company upon its investment in the business. The basis for calculation of the return on investment is based upon the investment levels and the profits earned. The calculation of the return on investment would help in calculating the rate of return at a particular period of time. In other words, the return on investment speaks about the efficiency of the investment in gaining returns. This also helps in making future decisions.

Return on investment is popular because of its simplicity in calculation and versatility. Investments with better ROI with minimal risk, is always chosen over the investments with less ROI. The variants used to calculate the return on investment is the cost incurred for the project and the net profit gained from the investment. The ratio of the net profit of the project with the cost of the project would give the return on investment. The return on investment is also measured in terms of percentage.

Benefits of constantly monitoring the return on investment are mentioned below: –

  • Correction of mistakes
    When an investment is made into a project or a campaign, it could prove positive or negative results. But, by monitoring the progress on the returns gained by the investment, mistakes can be identified and can be changed. This helps in covering the loop holes involved in the project which also helps in earning the firm, better returns for the investment made. If there are multiple projects being taken up by the firm, the underperforming projects can be identified. By taking up corrective measure, the performance of the underperforming projects can be increased.
  • Helps in making the best of the situation
    There could be times when certain projects could be well performing. Here the chances of gaining more returns from these projects could be possible by taking certain measure. Calculation of return on investment will help the firm to identify these situations to gain the most from these projects.
  • Helps in future planning of projects
    For the success of a project or a campaign, there are certain factors in the project that would be responsible. By calculating the return on investment on a regular basis for the project, the responsible factors for the success of the project can be identified. This in turn helps the firm to select these factors and eliminate the others in the further project or campaigns undertaken by the company.

These are the benefits that a firm can achieve by consistent monitoring of the return on investments. The methods to improve the return on investment differs one project to another.