# What is Return on Investment (ROI)?

Learn about ROI with Vinay Pathak

## Movie Case Study

The scene that you saw shows Kapoor (played by Rahul Vohra) explaining how a TV channel will earn through different variety of shows. He mentions fiction shows, countdown shows, and reality shows. For each show, he specifies the investment amount and the returns on it. The investment for the reality show is close to Rs. 10 crores and the return would be a minimum of 400% i.e. Rs. 40 crores.

In this blog, Learning Perspectives will explore the meaning of Return on Investment.

## What is Return on Investment (ROI)?

As the name suggests, ROI or Return on Investment is the premium or return earned on the money invested in the business. Hence, the name Return on Investment.

ROI is part of the profitability ratios. The profitability ratio helps in ascertaining the profit earned by the business during the year using different formulas. These formulas include:

• Gross profit ratio
• Net Profit Margin
• Operating Ratio
• Price-Earning Ratio

The formula used for ROI is given below:

### Example:

The scene mentions an investment of Rs. 10 crores or 10,00,00,000 in the reality show. Returns or profits that Rahul talks about are approximately 400%. So the ROI can be calculated as below:

Profit = 400/100*10 crores= 40 Crores

ROI= 40/10*100= 4%

### Gross profit ratio (GPR):

This ratio indicates the portion of each rupee of sales above the cost of goods sold. GPR generally varies for different industries. For example, the average GPR for the retail industry is close to 42.53%, for the software industry, it is close to 58%, and for the transport industry, it stands at 20%.

Gross Profit= Revenue- Cost of Goods Sold

Consider the income statement of Aike and Nadidas for 2019, we calculate ratios with the given data:

Aike’s Gross profit ratio indicates that Aike sells its merchandise for almost 66.67% of what it costs to produce while Nadidas GPR stands at 43.75%. The gross profit of Nadidas is high but not as high as Aike.

### Net Profit Margin:

It measures the income earned on each rupee of sales. This is calculated by dividing Net income by the sales of the company.

Net Profit = Net Income/Sales