Question

‘Return on Investment’ is a critical profitability ratio. It is calculated as follows:
\[ \text{Return on Investment (ROI)} = \frac{\text{Net Profit}}{____________} \times 100 \]

• A. Equity
• B. Debt
• C. Total Capital Invested
• D. Debt + Interest on Debt

Hint:

ROI measures profitability against all the money invested (equity + debt). Think: Return on Investment (total capital).

Answer 1

The Correct Option is C

Return on Investment (ROI) is a profitability ratio that measures how efficiently a company is using its total capital invested to generate profits. It is calculated by dividing the net profit by the total capital invested (which includes both equity and debt capital) and multiplying by 100 to express as a percentage. \[ \text{ROI} = \frac{\text{Net Profit}}{\text{Total Capital Invested}} \times 100 \]
Equity alone ignores debt, so it's not the denominator.
Debt alone ignores equity and overall capital.
Debt + Interest on Debt is incorrect as interest is an expense, not capital. Therefore, the correct answer is (C) Total Capital Invested.