High return on investment (ROI) indicates efficient use of assets. Comment.

Return on investment (ROI) is an important profitability ratio from the point of view of shareholders and reflects on the ability of management to earn a return on resources put in by the shareholders. Under ROI ratio the earning of the company can be viewed from different angles so as to take decisions on different causes responsible, to reduce or to enhance the profitability of the company. One way of finding out rate of return on assets employed in the company is to find the ratio of earnings before interest and taxes (EBIT) to capital employed. This ratio indicates operating income to the assets used to produce income. Another way of computing the ROI ratio is through the assets turnover ratio and margin of profit which gives the same results, as EBIT to capital employed. It may be seen from the following: ROI = (EBIT / Sales) X (Sales / Assets) = EBIT / Assets A high ratio of ROI indicates efficient use of assets and low ratio reflects inefficient use of assets by a company.