financial-metrics
ROI is a simple return ratio: gain from an investment divided by its cost. It is intuitive and dangerously undefined unless you specify the cash flows, the time period and whether money is time-weighted.
Management presentations love “ROI.” The formula looks harmless:
ROI = (Gain − Cost) / Cost
or Profit / Investment.
Without answers to which cash flows, over how many years, and before or after tax, two honest people can compute 12% and 40% on the same project. That is why professional investors reach for IRR (time-weighted for a stream of cash flows), ROIC (period return on invested capital of an ongoing firm), and GIPS-compliant time-weighted returns for portfolios.
Illustration only. Hypothetical warehouse automation project.
| Upfront capex | €2.0m |
| Annual cash saving (years 1–5) | €0.55m |
| Residual value year 5 | €0.4m |
| Simple ROI using one year of saving | 0.55 / 2.0 = 27.5% |
| Simple ROI using undiscounted five-year profit | (2.75 + 0.4 − 2.0) / 2.0 = 57.5% |
| IRR of the cash-flow stream | ~16% |
All three numbers can be labelled “ROI” in a slide. Only the IRR (or an NPV at WACC) is a decision tool.
Use simple ROI for back-of-envelope screening of one-period bets (a marketing campaign with a known cost and a known incremental profit in the same year). Do not use it to rank multi-year CAPEX, LBO equity tickets, or funds.
Internal project gates; marketing; teaching why definitional discipline matters before capital raising claims.
Ignores time value, risk, and capital still tied up. Easy to game by shrinking the denominator (allocating shared costs elsewhere) or inflating the numerator (counting revenue that would have happened anyway).
Dazur does not store a naked ROI field. We store the cash-flow schedule and compute IRR/NPV, and we store accounting ROIC for the going concern. If a teaser says ROI, we ask which one it is.