Question

Imagine that you are assigned to a team responsible for evaluating segment managers’ performance measures. A...

Imagine that you are assigned to a team responsible for evaluating segment managers’ performance measures. A team member has indicated that a friend who is a manager at a competitor’s company is evaluated using “ROI”, but does not know what “ROI” is. Explain what "ROI" is in your own words, and also explain why it is important to use it in analysis.

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Answer #1

Return on Investment (ROI) is a profitability ratio between Net profit and invesment made. This indicates the return the company made on the cost of investment made. It's the profitability on the cost/expense the company incurred. Eg. if a company is getting a return of $1 on investment of $10, it means every $10 invested by the company will yield $1.

ROI is important to evaluate the efficiency of the investment to achive the return. Better the efficiency of the use, better the return. It serves as a yardstick to compare and between various departments and between peers . It aids in detecting weaknesses with respect to the use or non-use of individual assets. It also helps in evaluating various investment opportunities.Also, its one of the simpliest method of evaluating the busines profitability.

   

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