ACCOUNTING TUTORIALS
Part 2: The Basics of Interpreting Financial Statements
Return on Investment (ROI)
- Return on investment is also called return on assets
- ROI is a measurement of management performance. It is the rate of return that a company’s management was able to earn on the assets that it had at its disposal during the fiscal year.
- There are various ways of calculating ROI. From a financial accounting perspective, however, the most common method is to divide net income by the average total assets during the fiscal year.
- To calculate the average total assets during the fiscal year, take an average of the total assets reported on the balance sheet at the end of the previous fiscal year, and the total assets reported at the end of the current fiscal year.
Hypothetical ROI calculation for fiscal year ending December 31, 2006:
- Total assets on balance sheet on December 31, 2005: $550, 000
- Total assets on balance sheet on December 31, 2006: $600,000
- Net income on income statement, December 31, 2006: $60,000
Return on investment (ROI) = net income / average total assets:
= $60,000 / ($550,000 + $600,000 / 2) = 10.4%