Question

Why does the ROI component indicate a companies financial health

Answer 1

ROI is basically a measure used to determine the performance of your investment. In other words, what is the return which one is getting on putting money in a particular investment.

ROI is a profitability measure for a company also because a company puts investment in form of assets etc to generate profit and stay ahead of competition.

For example : a manufaturing company will invest in bulding the plant, purchase assets and land, invest in R&D etc etc.. all to earn profit and return from it.

So, if we are talking about a company, its ROI can be compared with its return on assets ( ROA). So if a company has assets worth $100 and its net income is say $25, its ROI/ROA will be 25%.

So it is an important financial component for a company because it tells us that how efficiently a company is using its assets to generate returns.