According to Patricia Pulliam Phillips, Jack J. Phillips (2006), return on investment is a practice that compares revenues and investments giving an economic indication of the project. ROI is the definitive degree of accountability.
They further go on to say that, ROI provides a similar indication of the success of the investment as the cost-benefit ratio, CBR.
CBR = program benefit / program cost
ROI (%) = (Net program benefit / net program cost) * 100
100% ROI means that for every kes. 1 invested we get kes. 1 of return after meeting the all the cost.
Since profitability is measured against net income to investment, managers are encouraged to use assets at optimal levels to earn maximum profits. They are able to determine when the business should acquire and dispose of capital assets and in what quantities. ROI on a specific level of investment ensures effective exploitation of existing investments (Agarwal, 2015).
Agarwal, 2015 argues that individual ROI achievement in the business under every department
generally improves the overall ROI of the whole business. Moreover, owners of the business are able to compare ROI in the different departments and the overall ROI of the business against others in the same industry.
Agarwal, R. (2015). Return on Investment (ROI): Advantages and Disadvantages. Accounting. Retrieved May 22, 2016, from http://www.yourarticlelibrary.com/accounting/return-on-investment-roi-advantages-and-disadvantages/52928/
Patricia Pulliam Phillips, J. J. (2006). The basics. In Return on Investment (ROI) Basics (pp. 1-3). American Society for Training and Development. Retrieved May 21, 2016, from https://books.google.co.ke/books?id=PVZBteSXSIcC&printsec=frontcover&dq=return+on+investment&hl=en&sa=X&redir_esc=y#v=onepage&q=return%20on%20investment&f=false