ROI Concept

The term ROI (English acronym of return on investment) is a profitability indicator widely used in the companies economical and financial analyzes and that seeks to evaluate the management efficiency and capacity of the investments (or applications) made by the company as for the production of financial results, regardless how they were funded. The higher the ROE value better will be the company’s performance in the use of its investments. Thus defined, ROI can be calculated by the ratio between the net results purged from the funding costs and the value of the total investments of company, this is, its net assets.

ROI = (NR+ FFC) / A

In which NR = Net Result, FFC = Funding Financial Costs and A = Net Assets.

The use of ROI is especially useful to measure the influence of the financial leverage level over the results and the equity profitability: if ROI is superior to the funding average cost, such means that exists the possibility of use of the financial leverage to raise the results and the company’s profitability, this is, from an economical point of view, it’s worth it to raise indebtedness to finance new investments.

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.