ROI can be used in two ways.

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(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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