Return on investment
Return on investment compares a defined profit with the investment base supporting it, expressed as a percentage. Specify controllable or divisional profit and the asset or capital basis, including opening, closing or average amounts. It supports comparisons but can encourage managers to reject value-creating projects that reduce their current average return. Accounting policies, asset age and central decisions can distort it, so assess managerial and economic performance separately.
Worked example
A division earns $200,000 on $1 million investment, ROI 20%. A project earning $18,000 on $100,000 returns 18%; it can still be worthwhile if the required return is 12%.
Common mistake
A project below the division’s current ROI is not automatically bad for the organisation.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | APM | Direct | September 2026–June 2027 |
| ACCA | MA | Direct | September 2026–June 2027 |
| ACCA | PM | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
