The term return on investment, or ROI, is used to describe a number of financial metrics that are used to measure the profitability of a company. All of the return on investment metrics use variables found on both the income statement and balance sheet.
Return on investment is used by analysts and investors to understand management's ability to utilize available resources efficiently. Regardless of the size of the company, capital is always considered a scarce resource. Return on investment measures can be applied to the company's capital structure as well as in the evaluation of a subsidiary, a department, or even an individual project.
The three most common measures using the return on investment concept are:
When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Additional information on this topic can be found in our publication: profitability ratios.