Return-on-Investment (ROI) Measure

A Return-on-Investment (ROI) Measure is a business value measure that quantifies the financial performance of a business investment through a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time).

• AKA: Return on Costs, ROI Metric, Investment Efficiency Measure.
• Context:
  • It can typically calculate ROI Value through dividing ROI net benefit by ROI investment cost.
  • It can typically express ROI Result as a ROI percentage or ROI ratio for ROI comparison.
  • It can typically evaluate ROI Performance across different ROI time periods and ROI investment types.
  • It can typically inform ROI-Based Decision for ROI investment prioritization and ROI resource allocation.
  • It can typically demonstrate ROI Business Case through ROI financial analysis and ROI benefit projection.
  • ...
  • It can often incorporate ROI Cash Flow Analysis instead of relying solely on ROI profit calculation.
  • It can often include ROI Risk Assessment to account for ROI investment uncertainty and ROI market volatility.
  • It can often compare ROI Alternative against ROI benchmark for ROI investment selection.
  • It can often assess ROI Non-Financial Benefit alongside ROI financial return for ROI comprehensive evaluation.
  • It can often track ROI Performance Trend over multiple ROI reporting periods for ROI investment monitoring.
  • ...
  • It can range from being a Simple Return-on-Investment (ROI) Measure to being a Complex Return-on-Investment (ROI) Measure, depending on its ROI calculation complexity.
  • It can range from being a Short-Term Return-on-Investment (ROI) Measure to being a Long-Term Return-on-Investment (ROI) Measure, depending on its ROI measurement timeframe.
  • It can range from being an Actual Return-on-Investment (ROI) Measure to being a Forecasted Return-on-Investment (ROI) Measure, depending on its ROI timing perspective.
  • It can range from being a Financial Return-on-Investment (ROI) Measure to being a Strategic Return-on-Investment (ROI) Measure, depending on its ROI value focus.
  • ...
  • It can be normalized through ROI Rate of Return for ROI time period comparison.
  • It can be referenced during ROI Analysis that produces ROI report for ROI stakeholder.
  • It can be integrated with ROI Dashboard for ongoing ROI performance tracking.
  • It can be customized for ROI Industry Application including ROI marketing application, ROI IT application, and ROI manufacturing application.
  • ...
• Examples:
  • ROI Calculation Methods, such as:
    • Basic ROI Calculation Methods, such as:
      • Traditional ROI Calculation Method using (ROI gain from investment - ROI cost of investment) / ROI cost of investment.
      • Annualized ROI Calculation Method dividing ROI total return by ROI number of years for ROI annual comparison.
      • Cash-on-Cash ROI Calculation Method measuring ROI cash income against ROI cash outlay.
    • Advanced ROI Calculation Methods, such as:
      • Discounted ROI Calculation Method incorporating ROI time value of money through ROI discount rate.
      • Risk-Adjusted ROI Calculation Method accounting for ROI risk factor in ROI calculation.
      • Total Cost of Ownership ROI Calculation Method including all ROI direct cost and ROI indirect cost.
  • ROI Application Domains, such as:
    • Financial ROI Applications, such as:
      • Capital Investment ROI evaluating ROI capital allocation for ROI shareholder value.
      • Project Investment ROI assessing ROI project funding against ROI project outcome.
      • Return on Marketing Investment (ROMI) measuring ROI marketing spend against ROI marketing result.
    • Operational ROI Applications, such as:
      • Technology ROI quantifying ROI technology investment impact on ROI operational efficiency.
      • Process Improvement ROI calculating ROI process change benefit versus ROI implementation cost.
      • Training ROI measuring ROI training program impact on ROI workforce productivity.
  • ROI Measurement Outcomes, such as:
    • Quantitative ROI Outcomes, such as:
      • Increased Sales ROI measuring ROI revenue growth from ROI sales investment.
      • Cost Reduction ROI calculating ROI expense decrease from ROI efficiency initiative.
      • Productivity Improvement ROI assessing ROI output increase per ROI resource unit.
    • ROI Business Impacts, such as:
      • Customer Retention ROI measuring ROI customer loyalty improvement value.
      • Market Expansion ROI evaluating ROI new market entry against ROI market development cost.
      • Innovation ROI assessing ROI new product development against ROI research investment.
  • ...
• Counter-Examples:
  • Gross Revenue Measure, which tracks overall income without accounting for investment cost or ROI calculation.
  • Net Present Value (NPV) Measure, which calculates the present value of future cash flows minus initial investment without expressing as a percentage return.
  • Internal Rate of Return (IRR) Measure, which identifies the discount rate that makes NPV zero rather than directly measuring return relative to cost.
  • Qualitative Investment Result Measure, which evaluates non-financial outcomes such as customer satisfaction, processing speed, and quality improvement without ROI quantification.
  • Payback Period Measure, which calculates time to recoup investment rather than percentage return on investment.
• See: Business Value Measure, Financial Performance Indicator, Business Case Analysis, Investment Analysis Framework, Business Driver Assessment, Average Annual Rate of Return, ROI Calculation Methodology.

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References

2022

• (Wikipedia, 2022) ⇒ https://en.wikipedia.org/wiki/Return_on_investment Retrieved:2022-1-12.
  • Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. In economic terms, it is one way of relating profits to capital invested.

2015

• Joe Knight. (2015). “The Most Common Mistake People Make In Calculating ROI.” In: Harvard Business Review.
  • QUOTE: ... A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.

    Occasionally companies analyze investments in terms of their effect on revenue. That’s because many young companies focus on hitting certain revenue targets to satisfy their investors. But revenue figures say nothing about profitability, let alone cash flow. True ROI analysis has to convert revenue to profit, and profit to cash. ...

    Once you grasp the cash vs. profit distinction you can better understand the four basic steps of ROI analysis.

    1. Determine the initial cash outlay. ...
    2. Forecast the cash flows from the investment. ...
    3. Determine the minimum return required by your company. ...
    4. Evaluate the investment. ...

2014

• http://www.investopedia.com/terms/r/returnoninvestment.asp
  • QUOTE: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

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