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Definition of 'Return On Investment - ROIA performance measure used to evaluate the efficiency of an investment or to compare the efficiencyof a number of different investments. To calculate ROI, the benefit (return) of an investment is dividedby the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling theinvestment of interest. Return on investment is a very popular metric because of its versatility andsimplicity. That is, if an investment does not have a positive ROI, or if there are other opportunitieswith a higher ROI, then the investment should be not be undertaken.

Keep in mind that the calculation for return on investment and, therefore the definition, can bemodified to suit the situation -it all depends on what you include as returns and costs. The definition of 

the term in the broadest sense just attempts to measure the profitability of an investment and, assuch, there is no one "right" calculation.

For example, a marketer may compare two different products by dividing the gross profit that each

product has generated by its respective marketing expenses. A financial analyst, however, maycompare the same two products using an entirely different ROI calculation, perhaps by dividing thenet income of an investment by the total value of all resources that have been employed to make andsell the product.

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user'spurposes, and the result can be expressed in many different ways. When using this metric, make sureyou understand what inputs are being used.

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Definition of 'Return On Assets - ROAAn indicator of how profitable a company is relative to its total assets. ROA gives an idea as to howefficient management is at using its assets to generate earnings. Calculated by dividing a company'sannual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as"return on investment".

The formula for return on assets is:

Note: Some investors add interest expense back into net income when performing this calculation

because they'd like to use operating returns before cost of borrowing.

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies

can vary substantially and will be highly dependent on the industry. This is why when using ROA as a

comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA

of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of financing are

used to fund the operations of the company. The ROA figure gives investors an idea of how effectively

the company is converting the money it has to invest into net income. The higher the ROA number,

the better, because the company is earning more money on less investment. For example, if one

company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if 

another company earns the same amount but has total assets of $10 million, it has an ROA of 10%.

Based on this example, the first company is better at converting its investment into profit. When you

really think about it, management's most important job is to make wise choices in allocating its

resources. Anybody can make a profit by throwing a ton of money at a problem, but very few

managers excel at making large profits with little investment.

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Definition of 'Return On Equity - ROEThe amount of net income returned as a percentage of shareholders equity. Return onequity measures a corporation's profitability by revealing how much profit a company generates withthe money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity 

Net income is for the full fiscal year (before dividends paid to common stock holders but afterdividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the sameindustry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by

subtracting preferred dividends from net income and subtracting preferred equity from shareholders'equity, giving the following: return on common equity (ROCE) = net income - preferred dividends /common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity.Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a

period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equityfigure from the beginning of a period as a denominator to determine the beginning ROE. Then, theend-of-period shareholders' equity can be used as the denominator to determine the ending ROE.Calculating both beginning and ending ROEs allows an investor to determine the change in profitabilityover the period.

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Definition of 'Return On Invested Capital - ROICA calculation used to assess a company's efficiency at allocating the capital under its control toprofitable investments. The return on invested capital measure gives a sense of how well a company isusing its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.

The general equation for ROIC is as follows:

Also known as "return on capital"

Total capital includes long-term debt, and common and preferred shares. Because some companiesreceive income from other sources or have other conflicting items in their net income, net operatingprofit after tax (NOPAT) may be used instead.

ROIC is always calculated as a percentage. Invested capital can be in buildings, projects, machinery,other companies etc. One downside of return on capital is that it tells nothing about where the returnis being generated. For example, it does not specify whether it is from continuing operations or from aone-time event, such as a gain from foreign currency transactions.

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Definition of 'Return On Debt - ROD1. A measure of a company's performance or net income as related to the amount of debt it hasissued.

2. The amount of profit generated for each dollar that a company holds in debt.

3. A necessary factor when using the adjusted present value (APV) discounted cash flow method forvaluing levered assets. The APV method is often used in a leveraged buyout as a way of valuing a firmthat has a changing capital structure.

Return on debt (ROD) is a complex financial modeling skill and not a commonly used financialreporting factor.

Companies that carry significant amounts of debt relative to capital and/or assets are more at riskduring an economic downturn when earnings are likely to decline and credit measures may betightened.

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