RETURN ON INVESTMENT: CONCEPTIONS AND EMPIRICAL EVIDENCE FROM BANKING STOCKS

Abstract

Entrepreneurs decide to start their own businesses in order to earn a good return on their investment. If the return on investment and other profitability ratios demonstrate that this is not occurring then they should consider selling or restructuring the business and reinvesting elsewhere. With this in mind, the writer engaged archival research to find out the correct position of the term return on investment and its appropriate uses. The findings show that there are several ways to determine ROI but one distilled fact is that all of them have the same root in the sense that they provide a measure of return as a percentage of resources devoted. Hence, the general model for Return on Investment (ROI) is equals to (Total Revenue – Total Cost)/Total Cost multiplied by 100. That is, ROI is net gain divided by the total investment, expressed as an annual percentage rate. For an investment to be worthwhile, the return on investment must be greater than the cost of capital.  However, ROI is limited by the fact that it focuses on one period of time and thus should be considered a short term performance measure.

Keywords:  Return on Investment, return on equity, holding period return, arithmetic return, geometric return, nominal return, risk premium.