Aqid ERPWhat return on investment measures
Return on investment compares what came back with what went in: the gain (what was returned less the cost) as a percentage of the cost. SAR 10,000 that returned 12,500 earned 2,500, a 25% return. The figure says nothing about time: 25% over one year and 25% over five are the same ROI and very different investments.
Given the years, the calculator also shows the annualised return: the single yearly rate that, compounded over those years, would turn the cost into what was returned. 25% over two years is 11.8% a year, because 1.118 × 1.118 = 1.25.
A worked example
Equipment bought for SAR 10,000 earned and was sold for a total of 12,500 over two years.
| Profit: 12,500 − 10,000 | 2,500.00 |
|---|---|
| ROI: 2,500 ÷ 10,000 | 25% |
| Annualised: √1.25 − 1 | 11.8% a year |
What to put in
The cost is everything paid to get the return: purchase price, installation, fees. What was returned is everything received: income, resale, salvage. Leaving a cost out flatters the result. A loss shows as a negative return. For a project with payments spread over time, the annualised figure here is an approximation; a cash-flow schedule gives the exact rate.