Definition of ROI
ROI is the acronym for return on investment. Traditionally, ROI related 1) the income statement profit to the 2) the balance sheet investment.
A drawback of ROI is that the accounting amounts (revenues, expenses, asset book values, etc.) ignore the time value of money.
Examples of ROI
In the past, ROI was helpful for monitoring the decentralized divisions of large diverse corporations. The ROI calculation meant dividing division’s operating income by the average amount of operating assets being utilized by the division. For instance, if one of a corporation’s divisions reported operating income of $1 million and it had $10 million of operating assets, its ROI was 10%.
In recent times, it’s common to see ROI being used in the context of internet marketing and/or the adoption of wellness programs at large companies. In these situations, the income statement benefits (more sales, lower health insurance expense) are related to the amounts being spent. Here, too, the ROI calculations do not consider the time value of money.
