Return on investment definition

One return on investment definition is that it is a figure of merit of profitability used to help make capital investment decisions.

Typically, on a company, ROI is calculated by dividing net profits after taxes by total assets.

Another, more broad definition is to measure the benefits from an investment to the costs.

For example, in IT investments those benefits may be both financial (benefits on the organization's budget and finances) and non-financial (benefits on operations or mission performance and results).

Financial Return on Investment Definition

Most companies concentrate on the financial side of ROI.

The financial measures for return on investment include:

  • payback period
  • net present value
  • internal rate of return

Of these, academic books/studies typically recommends using the net present value method, as the other methods have some vulnerabilities.

However, both internal rate of return and payback period are still used in companies, as they are very easy measures to calculate.

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