Return on Investment % (R.O.I.)

Return on Investment % (R.O.I.)

Value of N.P.B.I ÷ Investment (x100)

Baseline: > 21%

Description:

This KPI measures the ability of your business to grow from the profits that it generates.

The best time for a business to expand is when this KPI is showing an increasing trend in line with the suggested baseline because this means that any growth can be funded by the company's profits as opposed to borrowed funds.

Example:

A) Net Profit Before Interest = R508,327
B) Funds Employed = R2,420,610
C) Return On Investment = 21% (A ÷ B X 100)

Discussion:

When anyone sets up a business, the main aim is to generate a profit. Obviously, you need sufficient profit to pay all the bills and salaries with some left over to enable the business to grow in the forthcoming year.

The reason that interest is not shown within this equation is because it measures the amount of profit being generated without any interference of borrowed funds.

If the trend of this KPI is diminishing, then you might choose to reconsider your overall business viability, as you will have a greater dependence upon borrowed funds, therefore increasing interest charges and reducing profitability.

Related Terminology:

This KPI is also known as Return on Funds Employed.


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