Techniques in measuring

Return on Investment
(ROI)
Senador V. De la Cruz
Basic Technique:

Rate of Return= Income

Investment
Example: Owner/s invested ₱1,000,000, and this amount
was used to financed a business operation that resulted in
earnings amounted to ₱ 200,000.
ROI= 200,000/1,000,000
= .20 or 20%
Meaning, for every ₱100 investment, they are going to earn
₱20.
The above formula and computation
may be modified depending on the users
of such ratio and the purpose for which
it is computed. For instance,
stockholders are interested in the ratio
measuring the return on their invested
capital, hence, for this purpose, the
term investment refers to stockholders’
equity.
Other related techniques:

 Return on Sales
 Gross Profit Ratio
 Net Profit Ratio
 Return On Total Assets
 Earnings per Share
Payback Method:
 Also called PAYOUT METHOD is a another simple
computation of ROI that involves the
determination of the “payback period”, which
refers to the length of time required by the
project to return the initial cost of investment.

Formula: Net Cost of Initial Investment

Annual Net cash Inflows
 Forexample, if a company plans to buy an
equipment for ₱50,000, and the equipment
is expected to give after-tax net cash
inflows of ₱10,000 per year, the payback
period is 5 years, computed as follows:

Payback period= ₱50,000/ ₱10,000

= 5 years
In payback method, you want to know when will
the cost of investment be recovered.
Other related techniques are:

 Bail-outmethod
 Accounting Rate of Return
 Net Present Value method
 Present Value Index