Finance
After reading Part 6 of Financial Intelligence, my take away that return on investment (ROI) can show the gain or loss from an investment that is relative to the amount of money invested into the project. Hence, this shows how investors use ROI for financial decision by comparing the efficiency of different investments. The building blocks of ROI are future value, present value, and a required rate of return. The building blocks assist in comparing profits and losses the investors can generate from an investment as compared to the expenses they incur. ROI thus enables the investors to accurately to appraise the profits of an investment from a stand-alone investment.
Applying ROI in the real-world will give investors for a business some numerical values to compare alternatives with and make more informed decisions. Regardless of the size and volume of investment, ROI is a valuable measure for business. ROI enables investors to determine whether a business can generate enough returns for success. Through measuring ROI, the investors stand a chance to realize the number of profits business is making, and the norms the business needs to increase its productiveness.
The application of ROI in stock valuation can be handled as a capital expenditure evaluation. Investors of stock are still interested in the return of investment of a stock purchase. There is still a risk that if the companies’ stock does not do well, and your return will be low or negative. Thus, ROI is used to measure the return level of stocks, which helps investors to decide whether to invest in an investment or terminate the investment. Moreover, ROI enables investors to value a stock, which helps in predicting future prices and the market price of a stock. Besides that, ROI assists investors in the market to hold stocks for a long- term. In a low-interest-rate environment, ROI valuation makes investors dabble in-stock purchase, which boosts their investment returns since, to hold on to stocks for a long term pays out higher profits.