When running a business, you certainly want a promising profit or profit, right? As a businessman, you must also be careful in seeing and taking advantage of the business opportunities you are engaged in. This is a consideration so that the money you have spent as capital can generate multiple profits. Then, what is ROI?
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ROI or Return of Investment is very important to be applied by business people and investors. To know more clearly about ROI, how to calculate it, and the factors that influence it, let’s look at the following reviews.
What is Return of Investment
Know What is ROI
In Indonesian, the meaning of return on investment is the profitability ratio that measures efficiency or accuracy by comparing the capital or total costs invested with the net profit earned. In short, ROI is the profit or return obtained from an investment.
The definition of what is ROI also refers to positive and negative values. Return on investment (ROI) will be assessed as positive if it shows profit or gain, whereas it will be negative if it shows a loss. ROI uses a ratio in the form of a percentage to measure the results of total assets, including the wealth or assets owned by the company.
For those of you who are just starting out in the business world, calculating ROI is highly recommended so that the business or business you are in can continue to run and grow. The benefit of ROI analysis is that it can be used as a determinant of business decisions, calculating investment investment, purchasing assets, and recruiting workers.
Return on investment (ROI) has various functions in a business. A company that has successfully carried out good accounting practices, then in management the use of ROI analysis techniques can function as a measure of the efficiency of the company with the capital used, production, and the marketing or sales department.
Meanwhile, for companies that have industrial data, ROI can be used to obtain industry ratios, namely by comparing the efficiency of the company’s capital use with other companies of the same type or in the same field. That way, business owners will know where the weaknesses and advantages of their company are compared to other companies.
Also read: Example of a Business Feasibility Study
ROI analysis is also very necessary because it is useful for planning purposes of a company in making decisions or procuring a company expansion. If the ROI analysis is not done properly and seriously, what will happen is that the business you are running is experiencing a loss.
This loss is because the profits or profits obtained are not able to cover the costs or capital incurred at the initial investment. Therefore, it can be concluded that ROI is used to measure the company’s ability to generate profits from the amount of funds that have been spent.
How to Calculate the Return of Investment
How to calculate ROI
To calculate the capital issued with the amount of profit earned, you can use the ROI calculation formula, which is as follows.
ROI = (total investment income – cost / initial capital): investment costs × 100%
An example of calculating ROI, for example, as an investor, you want to invest in 100,000 shares at a price of IDR 2,000 per share. Two years later, you intend to sell the shares that you own at a value or price per share of Rp.4,000.00, then the ROI you get is:
- Total investment income = 100,000 × 4,000 = IDR 400,000,000.00 (four hundred million rupiah)
- Investment cost = 100,000 × 2,500 = IDR 250,000,000.00 (two hundred million rupiah)
- ROI = (400,000,000 – 250,000,000): 250,000,000 × 100% = 0.6%
From the example above, you will only get an ROI of 0.6%. This means that you experience a loss, because you only get 0.006 times the capital that you have spent on investment.
Also read: How to Determine Product Selling Prices
Factors Affecting ROI
As a form of technique for analyzing profitability ratios, calculating ROI is very important for companies to find out how efficient the utilization of company assets is. There are several factors that affect return on investment, including:
- Turn over from the asset turnover rate or the turnover speed of operational activities within a certain period in a company.
- The amount of profit obtained from the operations of a company in the form of a percentage and total net sales (profit margin). This profit margin is useful for measuring the level of profit or profit earned by a company.
Not only advantages, apparently ROI analysis also has several weaknesses, namely the difficulty of comparing an ROI from a company with other similar companies. This is due to the application of accounting practices and methods of valuing various assets that are different from each company.
Another weakness of ROI analysis lies in a fluctuation in the value of money or the purchasing power of company equipment, such as machinery or production equipment. Purchasing equipment when there is inflation or will not affect the calculation of investment and profit margin.
An explanation of what ROI is and the factors that influence it can be an additional insight for those of you who are in the business world. Don’t focus too much on the profit margins of the goods or services that you produce. From now on, calculate ROI accurately and accurately so that the business you are running can continue to progress and grow rapidly.
