Return on Investment (ROI)
A metric that relates profit earned to capital employed, showing how that capital was returned.
Return on Investment, or ROI, measures the profitability of capital employed. It relates the profit earned to total capital and expresses, as a percentage, how strongly the invested capital was returned within a period.
Under the DuPont scheme, ROI can be broken down into two sub-metrics: return on sales (profit relative to revenue) and capital turnover (revenue relative to capital employed). Multiplying the two yields the ROI again. This breakdown shows whether an improvement is better achieved through margin or through faster use of capital.
ROI is well suited to comparing investments or business units of different sizes because it measures relatively, not in absolute terms. A machine with lower profit but significantly lower capital employed can show a higher ROI than a larger investment with higher absolute profit.
When interpreting ROI, it matters over which period and on which capital base it was calculated, since different definitions can limit comparability.
Formula
ROI = Profit / Total Capital x 100
Practical Example
A company employs 500,000 euros of capital and generates an annual profit of 60,000 euros, giving an ROI of 12 percent. Under DuPont, the same figure can result, for example, from a return on sales of 6 percent on revenue of 1,000,000 euros combined with a capital turnover of 2.
How Leanshift Helps
ROI lets investments in process improvement be compared directly against other investment options. Leanshift consistently translates improvement measures into such business metrics.
Frequently Asked Questions
What does an ROI of 100 percent mean?
The profit earned exactly matches the capital employed, meaning the capital was fully returned once over the period considered.
Why is ROI broken down using the DuPont scheme?
Because the breakdown shows whether an improvement is better achieved through a higher margin (return on sales) or more efficient use of capital (capital turnover).
Is a high ROI always a good sign?
Not necessarily; a high ROI can also result from a small, high-risk capital commitment, so it should always be interpreted in context.