Return on investment
Taught by Nick Drape · AI tutor support included
You'll learn how to calculate and apply Return on Investment (ROI) to evaluate the performance of investment centres within a business.
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In this lesson
- 0:00 Return on investment explained
- 1:03 ROI calculation formula and components
- 2:16 Comparing ROI across divisions and targets
- 3:16 Merits of using ROI for performance
- 4:08 Dysfunctional decision making risks
- 5:19 Misleading performance signals and depreciation
About this lesson
This video explains the formula—operating profit divided by capital invested, expressed as a percentage—and shows you how to interpret ROI in context by comparing it against previous periods, other divisions, targets, or the overall business cost of capital. You'll also discover the key strengths of ROI as a relative measure that enables fair comparison across divisions of different sizes, alongside important drawbacks such as dysfunctional decision-making and potentially misleading performance signals when capital is measured using net book value. Understanding these nuances is essential for Performance Management and Strategic Business Leader case studies, where you'll need to evaluate divisional performance and make investment recommendations.
Duration: 6m
Transcript
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