Return on investment (ROI)
Return on investment (ROI) measures how much profit is made from an investment relative to its cost, expressed as a percentage. BDC calculates it by dividing net income, which is earnings after tax, by total invested capital and multiplying the result by 100.
ROI can be used to compare the profit a business earns with the money put into acquiring it. It is a ratio computed from past or projected figures. It is not a forecast, a valuation or a recommendation. Cash is a separate question, covered in what cash flow means when buying a business.
How it is calculated
BDC calls ROI the broadest measure of profitability used by shareholders, and says many operating activities influence it, including sales volumes and expenses, along with non-operating activities such as how managers use the company’s capital and assets. Statistics Canada defines two related ratios with different denominators. Return on equity is net income over total equity, and return on assets is net income over total assets. Two people can both say “return” and mean different ratios.
What to check or ask
- Which earnings figure is used, and whether it is after tax as BDC’s formula requires
- What counts as invested capital: the purchase price alone, or also fees and working capital
- Whether earnings were adjusted first; see normalization
- Which period the figure covers, and whether it is historical or projected
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is Return on Investment (ROI)
- 02Statistics CanadaResearch dataMethodology used to create enterprise size and financial ratios
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