Profit is the financial return that a business earns from its activities. However, it is also important to consider what has been invested in order to earn that return. One way to look at the return on an investment is to calculate return on capital.
Capital is the amount invested in a business
Return on capital is the percentage return on that investment
The calculation formula is as follows:
Here is an example of this calculation using some business data:
What does the return on capital tell us?
A measure of the returns made from investing in the business
How good the business is at converting money invested into profit
Provides a means of comparison with other investment opportunities
Opportunity cost – what an investor could have done by investing elsewhere
