Return on Investment (ROI) is defined as net income divided by the average of shareholders equity, long term debt and other long term liabilities for the most recent financial year. Average of shareholders equity, long term debt and other long term liabilities is calculated by considering the average of the aforementioned items at the beginning and ending of the financial year. ROI is an efficiency indicator that helps understand the number of units of income earned for every Rs.100 investment.

For example, let’s assume the operating income of a company is Rs.30, long term debt is Rs.25 and shareholders equity is Rs.150. The total capital is the sum of long term debt and shareholders equity, hence 25+150 = Rs.175. ROI will be calculated as 30 / 175 = 17.1%. This indicates that the company earned Rs.17.1 for every Rs.100 investment

A company’s current ROI can be compared with its historical returns, ROI of companies operating in the same sector can also be compared with each other.