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Why is it important to analyze profitability, specifically focusing on return on investment? Invoke the breakdown...

Why is it important to analyze profitability, specifically focusing on return on investment? Invoke the breakdown of ROI in thinking about your response.

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Answer #1

ROI(Return on investment) is an important indicator of the profitability from any business/investment. Generally, return on investment is calculated by using below formula-

Net profit(loss) from any business or investment ×100/ Total investment

Below are the reasons why we use ROI to analyze the profitability from an investment-

1. Comparision is possible among different investments.

2. Increment in investment can be seen year by year.

3. Decision to continue in an investment can easily be taken.

4. It is a benchmark of the profitability of a business.

5. Dividend distribution decision is taken on the basis of ROI.

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