Every business person certainly wants to get a profit from each transaction and how to calculate ROI. In achieving this, of course, business actors must be careful in seeing business opportunities so that any capital issued returns becomes profit.
To be at that level, of course, business people must have knowledge about investment and the level of profit.
This knowledge also applies to investors who must be careful in making predictions. Whether the business that he takes can return the value of the investment he has invested or not. Prediction is what is meant by the analysis of Return on Investment or ROI.
What is ROI? Here is a complete review of the Return on Investment.
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The definition of ROI
ROI is Return on Investment, which is a form of profitability ratio that can measure business actors, both individuals and companies, with all the funds that have been invested in assets that are used for profit.
Benefits of ROI analysis
After understanding ROI above, of course, we have benefits for the progress of a company’s business as follows:
- Can measure the efficiency of using invested capital, sales efficiency, to production efficiency.
- For companies that have industrial data, of course, they can analyze ROI and can compare the efficiency of other companies in terms of capital use.
- Measuring the efficiency of the actions taken by each division division is done by allocating all costs and capital into the relevant division.
- Can measure the profitability of the company’s products.
- Used as a basis for decision making if the company is expanding.
ROI supporting factors
ROI (Return on investment), which means it shows the profitability ratio to measure the company’s ability to generate profits.
To get this ratio of return on investment is influenced by several factors, there are two factors that can affect the ROI analysis, namely:
Asset Turnover Rate How to Calculate ROI
Asset turnover rate can affect the calculation of the ratio used for a company for all operational activities.
The speed at which assets rotate during a period can affect the return on investment even if this ROI is positive or negative.
Profit margin is the ratio of income obtained from the difference between net sales and cost of goods sold divided by net sales.
Directly this profit margin will show as well as measure the company’s ability to generate profits and can also provide an assessment of the ability of business management to manage operational needs.
How to calculate ROI
ROI shows the ratio of profit to cost, as for how to calculate ROI as follows:
ROI = (Total Sales-Investment)
Investment x 100%
Example if we invest Rp. 100,000,000 which resulted in sales of Rp. 150,000,000, which means a profit of Rp. 50,000,000.
Then if you calculate ROI as a percentage, namely:
ROI = ()
IDR 150,000,000-IDR 100,000,000 IDR 100,000,000 x 100%
ROI = 50%
From the ROI formula above, it can be concluded that the ROI rate is 50%.
Strengths and Weaknesses of How to Calculate ROI
ROI (Return on investment) can indeed show the rate of return on assets used. With various benefits, this ROI certainly has advantages and disadvantages as follows:
Advantages of ROI
- One of the principal uses that are comprehensive. If the company already has good management accounting, management can use the ROI technique to analyze the efficiency of using working capital, product efficiency and sales efficiency.
- If the company can have industry data, of course, the industry ratio can also be obtained, using ROI analysis, it can compare with other companies so that it can be seen that the company’s rank is below, the same or above.
- ROI analysis can measure the efficiency of actions in all divisions by providing capital to all the parts concerned.
- ROI analysis is also used to measure the profitability of each product produced by the company.
- ROI can be used for planning purposes. Such as when making decisions if the company wants to expand.
Weaknesses of ROI
- Weaknesses of ROI in comparing the rate of return of companies with other companies. Because not every company has different accounting practices, these differences in methods can produce a false picture.
- Another weakness, namely, lies in the fluctuation in the value of money or the purchasing power of a certain machine or equipment purchased during inflation. With this difference in value will affect investment and profit margin.
- ROI analysis cannot be used to compare between two or more companies. ROI is obtained from two sales ratios where the analyzer does not know the cause of the changes in the sales.
Thus understanding and how to calculate ROI (Return on Investment) has also become very important for you to know as a business person. Hopefully this article review can help in growing your business. Thanks.