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Return On Investment (ROI) is an
accounting valuation method.
Because the numerator (Net Income) is an
unreliable corporate performance measurement, the outcome of the formula
for ROI must also be unreliable to determine success or corporate value.
However the ROI formula still keeps showing up in
many annual reports...
The degree to which Return On Investment (ROI) overstates the
economic value depends on at least 5 factors:
1. length of project life (the longer,
the bigger the overstatement)
2. capitalization policy (the smaller the
fraction of total investment capitalized in the books, the greater will be
the overstatement)
3. The rate at which depreciation is
taken on the books (depreciation rates faster than straight-line basis
will result in a higher ROI)
4. The lag between investment outlays and
the recoupment of these outlays from cash inflows (the greater the time
lag, the greater the degree of overstatement)
5. the growth rate of new investment
(faster growing companies will have lower Return On Investment )
Formula
Net Income / Book
Value of Assets = ROI
(Better) alternative:
Net Income+Interest
(1-Tax Rate) / Book value of Assets = Return On Investment
Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive
Guide - 
Book: Ciaran Walsh - Key Management Ratios -
Compare:
EBIT |
EBITDA |
Economic Value Added |
Earnings Per Share |
Return on Equity |
Net Present Value |
Return On Net Assets |
Return on Invested Capital |
Relative Value of Growth
More valuation methodologies
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Summaries of 2,000 management methods