5
Return on investment
This chapter will:
- Review the term ‘return on investment’
- Explore its various derivative measures
The generic term ‘return on investment’ is one of the most important concepts in business finance.
Every dollar of assets can be matched to a dollar of funds provided by the financial markets. The providers of these funds need to be paid. Payment comes from the operating surplus (or profit) generated from the utilisation of assets. Return on investment measures operating surplus as a proportion of the underlying assets/funds required to generate that surplus.
If return on investment is equal to or greater than the cost of funds, then the business is viable. However, if return on investment (in the long term) is less than ...
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