Return on investment

In business, the purpose of the return on investment (ROI) metric is to measure, per period, rates of return on money invested in an economic entity to decide whether or not to undertake an investment. It is also used as an indicator to compare different investments within a portfolio. The investment with the largest ROI is usually prioritized, even though the spread of ROI over the time period of an investment should also be taken into account. Recently, the concept has also been applied to scientific funding agencies’ (e.g., National Science Foundation) investments in research of open source hardware and subsequent returns for direct digital replication. ROI and related metrics provide a snapshot of profitability, adjusted for the size of the investment assets tied up in the enterprise. ROI is often compared to expected (or required) rates of return on money invested. ROI is not time-adjusted (unlike e.g. net present value): most textbooks describe it with a "Year 0" investment and two to three years' income. Marketing decisions have an obvious potential connection to the numerator of ROI (profits), but these same decisions often influence assets’ usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected. In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the "return on investment" metric very useful. because it does not account for the environmental, social, and governance performance of an organization. Without a metric for measuring the short- and long-term environmental, social and governance performance of a firm, decision makers are planning for the future without considering the extent of the impacts associated with their decisions. One or more separate measures, aligned with relevant compliance functions, are frequently provided for this purpose. == Calculation ==

Return on investment can be calculated in different ways depending on the goal and application. The most comprehensive formula for return on investment (ROI) is: ROI (%) = \frac{I_0 + I - Q}{Q} \times 100% where I_0 is the current value of investment, I is income from investment, and Q is the initial investment and other expenses. For example, you invested $10,000 in stocks (initial investment) and paid $200 in brokerage fees (other expenses). After one year, the current value of your investment is $12,500, not yet sold. During the year, you received $300 in dividends (income from the investment). So, the ROI is the following: ROI (%) = \frac{12500 + 300 - 10200}{10200} \times 100% = 25% As the duration of this investment is 1 year, this ROI is annual. For a single-period review, divide the return (net profit) by the resources that were committed (investment): Property Complications in calculating ROI can arise when real property is refinanced, or a second mortgage is taken out. Interest on a second, or refinanced, loan may increase, and loan fees may be charged, both of which can reduce the ROI, when the new numbers are used in the ROI equation. There may also be an increase in maintenance costs and property taxes, and an increase in utility rates if the owner of a residential rental or commercial property pays these expenses. Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan. Marketing investment Marketing not only influences net profits but also can affect investment levels too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions. ROI is a popular metric for heads of marketing because of marketing budget allocation. Return on Investment helps identify marketing mix activities that should continue to be funded and which should be cut. == Return on integration (ROInt) ==

To address the lack of integration of the short and long term importance, value and risks associated with natural and social capital into the traditional ROI calculation, companies are valuing their environmental, social and governance (ESG) performance through an integrated management approach to reporting that expands ROI to Return on Integration. The social cost of carbon is one value that can be incorporated into Return on Integration calculations to encompass the damage to society from greenhouse gas emissions that result from an investment. This is an integrated approach to reporting that supports Integrated Bottom Line (IBL) decision making, which takes triple bottom line (TBL) a step further and combines financial, environmental and social performance reporting into one balance sheet. This approach provides decision makers with the insight to identify opportunities for value creation that promote growth and change within an organization. == See also ==