ROI can be used in two ways.
(1) As a control technique to compare divisional performance within a company.
(2) As a planning decision technique to decide to accept or reject projects
ROI can be looked at in two ways:
ROI = Net profit / Net investment in assets
OR
ROI = Net profit x Sales
—————- ————
Sales Net assets
ROI is not only a function of profitability but is also a result of asset utilisation
It is essential that when the ratio is used for comparison purposes that the same accounting rules and procedures are used to arrive at profit and capital employed.
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