What does the return on investment (ROI) mean?
The return on investment (ROI) is one of the most important key figures for evaluating investments. The ROI shows how much profit an investment has generated in relation to the funds invested. In German, it is also referred to as the return on capital.
For many companies, ROI is a decisive measure of success and profitability. Solo self-employed and small businesses use it just as much as medium-sized companies and global corporations. The challenge lies in calculating ROI as simply and precisely as possible using the right tools so that it can be used as a key performance indicator in day-to-day business and continuously optimized.
ROI: significance for corporate management
Calculating the return on investment helps to evaluate the efficiency of individual projects, specific departments or entire divisions.
The ROI analysis is usually carried out retrospectively: it summarizes in a precise key figure whether and to what extent the use of capital has been economically worthwhile and enables a well-founded comparison of investments.
ROI can also be used to forecast future developments: By estimating expected sales, companies can run through various scenarios and assess in advance whether an investment is likely to pay off. Using the predictive ROI, companies can prioritize investments that will pay off quickly and contribute to their long-term profitability.
Use case: How to calculate the ROI of an ERP implementation
Advantages and disadvantages of ROI as a key figure
ROI has clear advantages that make it the standard indicator for many companies:
- Informative value: The ROI enables a well-founded assessment of how successful an investment was. This simplifies further decision-making.
- Simple calculation: Calculating ROI is generally straightforward and can be done quickly with analysis tools.
- Comparability: Thanks to the universal formula, the ROI enables comparisons between projects of different types and sizes, even if they are located in different departments.
However, there are also limitations and weaknesses of ROI that companies should consider when using it:
- One-sided focus: The indicator only measures financial success. Whether an investment has improved the brand image, strengthened customer loyalty or improved the carbon footprint is not taken into account by the KPI. However, this holistic view is becoming increasingly important for the sustainable success of organizations.
- Neglecting the time dimension: ROI is a static indicator and does not directly include time in the calculation. The success of investments with long-term benefits or a long amortization period may therefore be underestimated if the key figure is calculated early.
- Susceptible to short-term optimization: ROI is aimed at quick profits. If the key figure is given too much weight in companies, it can lead to long-term and sustainable investments being neglected.
Calculate ROI: The formula and basics
The basic formula for calculating return on investment (ROI) is simple. It shows the efficiency of an investment by putting the profit in relation to the costs of the investment. The formula is:
ROI=(profit/investment)×100
Here, profit stands for the net profit generated by the investment, i.e. sales less all associated costs.
The investment describes the amount originally invested. This basic formula is often used to make a quick statement about the profitability of a project or purchase.
How should the results be interpreted? An ROI of 100% means that the investment has generated twice as much profit as it cost. At 0% ROI, companies break even. This means that they have recouped their investment costs but have not made a profit. With negative percentages, companies make losses.
Extended ROI formula: The DuPont key figure system
For more complex business models, the DuPont system of key figures is often used to calculate ROI. The system divides the return on investment into two key figures: return on sales and capital turnover. It shows how efficiently a company uses both its profitability and its capital employed. Here is the formula:
ROI=return on sales×capital turnover
The return on sales is calculated as follows:
Return on sales=(profit/sales)
It shows what proportion of turnover remains in the company as profit. Capital turnover, on the other hand, provides information on how often the total capital was turned over during the year:
Capital turnover=(turnover/total capital)
The DuPont formula allows a differentiated analysis, as it clearly separates how much of the profit was achieved through efficiency in revenue (return on sales) and how much through high capital utilization (capital turnover). It is particularly useful for comprehensive company valuations and for identifying optimization opportunities.
Good to know: There are other, extended calculation formulas, such as the social ROI, which aim to compensate for the weaknesses of the classic ROI calculation – focus on monetary success. Social ROI, for example, takes into account the social and environmental benefits of investments.
What is a good ROI? Industry benchmarks and optimization strategies
The question of what constitutes a good ROI can be answered differently depending on the industry. There are various benchmarking databases from which companies can draw industry-specific comparative values.
In traditional sectors, the return on investment for companies with stable growth is lower (7-10%) than for companies in growth sectors with higher risks (>20%).
Wer seinen ROI verbessern möchte, hat zwei Ansatzpunkte: Effizienzsteigerung und Kostensenkung. Zum Beispiel können Unternehmen versuchen, Rohstoffe bedarfsgerechter einzukaufen, Prozesse zu automatisieren oder Aufgaben gezielt outzusourcen. Ein Branchen-Benchmarking kann helfen, Einsparpotenziale schneller zu erkennen und die richtigen Maßnahmen zu priorisieren.
ROI and ERP systems: How ERP software and BI systems improve the ROI calculation
ERP-Systeme bilden seit Jahrzehnten das digitale Rückgrat von Unternehmen. Sie integrieren Finanz-, Produktions- und Verwaltungsdaten und bieten eine umfassende und konsistente Datenbasis zur strategischen Steuerung der Organisation – und zur ROI-Kalkulation.
In the past, the return on investment was calculated on the basis of static data – such as annual financial statements or periodic financial reports. Thanks to modern ERP systems, companies have long had a dynamic view of all relevant key figures. Digital applications support both retrospective and predictive ROI calculations.
In conjunction with business intelligence (BI) tools, it is easy to monitor ROI in real time. On the ERP dashboards, users can see exactly how the profitability of certain investments is developing. Which product groups and regions show a particularly high ROI? What is the impact of budget changes? Thanks to clear visualizations, users can see the answers at a glance and can quickly take measures to adapt to changing market conditions.
ROI calculation: New technologies, new possibilities
Seit einigen Jahren werden Technologien wie künstliche Intelligenz (KI) und maschinelles Lernen zunehmend in ERP-Systeme integriert. Diese Entwicklung verändert nachhaltig, wie Unternehmen den ROI analysieren und nutzen.
Areas of application for AI in ROI optimization
AI makes it possible to recognize new correlations and patterns from the huge amounts of data in ERP systems that influence the return on investment but are difficult to capture using conventional analysis methods. This provides companies with important starting points for ROI management.
Forward-looking AI-based analyses, known as predictive analytics, can also forecast the ROI of future investments with a high degree of precision. They are able to identify weak points in processes and assess their impact on ROI. This data basis makes it easier for companies to decide whether they want to make investments immediately or adapt processes and planning first in order to achieve a better ROI.
Application examples
Warehouse management: The costs of procurement and warehousing have a significant impact on the return on investment of a product. With the help of AI algorithms that are integrated into the ERP system, companies can calculate optimal stock levels and have orders managed by the AI in such a way that storage costs are reduced.
Produktion: KI kann die Leistung von Maschinen überwachen und präventive Wartungen so terminieren, dass die Produktion nicht beeinträchtigt wird. Damit erhöht sich die Produktivität und die Lebensdauer von Maschinen kann verlängert werden – beides verbessert den ROI der Produktionsanlagen.
Personalplanung: Die Kosten für Überstunden und die Effizienz der Mitarbeitenden wirken sich direkt auf den ROI eines Unternehmens aus. KI-gestützte Personalplanung optimiert Arbeitszeiten und Einsatzpläne, indem sie auf historische Daten zurückgreift und Nachfrageprognosen berücksichtigt. Dadurch lassen sich Fachkräfte optimal einsetzen, was den ROI der Personalwirtschaft erhöht.
The performance of artificial intelligence will increase in the coming years. Forecasts will become even more accurate and it will be possible to increasingly automate the management of influencing factors. It can also be assumed that in future, AI will not only take quantitative factors into account when calculating ROI, but also qualitative factors such as customer satisfaction and brand image – which previously involved a great deal of manual effort.
