Return on Investment: Who doesn’t like to get something back for his investment?
ROI = (profit / revenue) * (sales / total capital)
The widespread “return on investment” factor multiples the profitability with the turnover rate of the capital. Thus, many value drivers can be compared (sales, coverage, stocks). The invested capital should generate a return flow.
Total capital = balance sheet total (simplified). Adjusted: Total Capital = Equity + Liabilities (excluding current liabilities). In order to not distort this factor by the actual operating purpose, the ordinary operating result and not the profit should be used. The ordinary operating result does not include any interest rates, no extraordinary items and no taxes.
The return on investment is also used on investment projects. Further explanations can be found on Wikipedia. A target value of> 10% should be taxed as a goal for all companies. In capital-intensive industries it is rather a bit less.
A meaningful interpretation is only possible if the result can be split accordingly. In this way, a manipulation of the key figure can be seen. If, for example, a declining return on sales is compensated by a corresponding smaller capital injection, the result of the abbreviated formula remains unaffected. In addition, fluctuations in the result can thus be attributed to changes in the return on sales or the turnover rate of the capital and thus to be investigated more precisely.