Assessing risk and return

You can use risk and return ratios to judge how successful your business investments are and find out what effect further investment may have in specific areas of the business.

Return on investment ratio

The return on investment ratio is perhaps the most important investment ratio, as it measures the return on the funds invested in the business by you, its owner.

This helps you assess how successful your investment has been and will guide decisions about investing more in the profitable areas of the business.

This ratio gives an indication of the effectiveness of your business in generating a profit. The higher the ratio, the greater the return on assets.

If the return on investment ratio is less than the rate of return on an alternative risk-free investment, such as a bank savings account or other secure bank investments, then you may need to work with a business adviser to consider alternative investment options.

Use the following interactive calculator to help you work out your return on investment ratio. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your return on investment ratio.

Return on investment ratio

Use this formula to calculate your return on investment ratio.

Return on investment ratio = net profit before tax ÷ total assets

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