The index of return on investment as an indicator of their effectiveness

There are a number of methods that allow you to assess the effectiveness of a particular activity of an enterprise. One of the most popular methods, which can be called one of the simplest, is the calculation of profitability indicators. By determining profitability, the company's production and marketing activities, the degree of efficiency of the use of assets and equity, and much more are evaluated. One of the most important indicators of this group is the index of return on investment, and it is on it we will dwell in more detail.

As can be judged by the name, the return on investment index allows you to assess the degree of efficiency (profitability) of certain investments. This indicator can be used for both financial and real investments. However, the calculation in each of these cases may be somewhat different. The main difference is that when determining the profitability of investments in certain financial instruments, the time factor is often not taken into account. This is due to the fact that such investments are usually made for a much shorter period than real investments.

The index of return on investment, like any other coefficient of profitability, characterizes the ratio of profit to a certain indicator. In this case, the profit is compared with the amount of investment. In the case of financial investments, for example, the acquisition of a particular type of securities, the calculation is as follows: the numerator is the total amount of income received from possession of the security (interest income and the difference between the price of purchase and sale), and in the denominator - the price Purchases, that is, initial investments.

In the case of a project related to the implementation of real investments, the calculation of the index in question will be somewhat more complicated. Given the time factor, it is necessary to divide the discounted amount of cash flow for the analyzed period by the amount of discounted investments for the same period. It should be noted that for such a coefficient a value is established that clearly indicates efficiency or inefficiency. This value is 1. Accordingly, if the resulting index is larger, then the project should be accepted, if less - to reject. In the case of a factor equal to one, it is necessary to take into account the presence of other positive effects besides the economic one. Obviously, this coefficient can be calculated in a slightly different way, namely, by the ratio of the net present value to the value of the discounted investment. The obtained value will need to be increased by one. Based on the above, we can conclude that indicators such as NPV and profitability index are interrelated. With a negative current project cost, the ROI will be less than one, and vice versa.

The estimation of profitability has found wide application in various spheres of activity of the enterprise. For example, there is a method of return on investment, which is one of the methods of pricing. Its essence lies in the fact that the implementation of a project associated with the production of a certain product should ensure profitability at a level that will allow paying borrowed resources.

In addition, there are a number of indicators that characterize not an individual project, but an enterprise as a whole. For example, the rate of profitability of an enterprise is determined by the ratio of profit to cost and allows you to judge how effective the production activity is. Such indicators have no established normal or boundary values, so they need to be analyzed in dynamics.