Question

why investors are interested in ROI describe your answer in the light of ROI and the economy and ROI and the company

i want a detaqled answer with examples ... this is assignment of busines finance for m.com

Answer 1

Return on Investment(ROI):

ROI is the ratio which states the return earned by the company using its investment.

Formula : ROI = Net profit ÷ Total investments

Here net profit stands for the total profit earned by the company during the period and total investment means total amount invested in the company. Investment includes equity as well as long term debt investment such as debentures

Use of ROI for investors:

ROI is a financial ratio which indicates the overall profitability of the company with respect to the investment. Investment is always interested in ROI as it shows the capability of the company to earn profit . Higher the ROI percentage means company is earning good profit on total investment. The is also a good relative indicator. Investor can compare ROI of different companies and also compare ROI of the company with industry average to take informed decision about investments .

Example:

1. If a company has earned Net profit of $10,000 during the year and total investment in the company was $ 100,000 then

ROI = 10,000/100,000 = 10%

Which means company company will earn 10% return on your investment.

Investors are benefitted due to this either in the form of Divided payouts or capital appreciation in the form of increase in price.

It's is also important to compare ROI of different comapanies which are comparable for example other factors such size , growth , competition, state of economy also affect the ROI of a company

Let us understand the use of ROI with the example,

XYZ inc reported ROI for different years as follows

Yr 1 = 10%

Yr 2 = 12%

Yr 3= 15%

And ABC inc reported ROI aa follows during the similar periods

Yr 1 = 17%

Yr 2 = 16%

Yr 3 = 15%

So here we can see that XYZ inc showing growth in ROI whereas in case of ABC inc ROI is decling therefore even if the ROI in the recent year is same for both the companies it is better to invest in XYZ inc assuming other factors are same for both the companies .

So we can conclude by saying ROI is one of the important financial indicator for investors as it shows profititabily with respect to the total investment .