Return on Investment falls under the group of which ratio?

Profitability Ratio

The correct answer is option 4- Profitability Ratios.

The profitability or financial performance is mainly summarised in the statement of profit and loss. Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised. The various ratios which are commonly used to analyse the profitability of the business are: 1. Gross profit ratio 2. Operating ratio 3. Operating profit ratio 4. Net profit ratio 5. Return on Investment (ROI) or Return on Capital Employed (ROCE) 6. Return on Net Worth (RONW) 7. Earnings per share 8. Book value per share 9. Dividend payout ratio 10. Price earning ratio.

* Return on Capital Employed or Investment explains the overall utilisation of funds by a business enterprise. Capital employed means the long-term funds employed in the business and includes shareholders’ funds, debentures and long-term loans. Alternatively, capital employed may be taken as the total of non-current assets and working capital. Profit refers to the Profit Before Interest and Tax (PBIT) for computation of this ratio. Thus, it is computed as follows:
Return on Investment = Profit before Interest and Tax/ Capital Employed × 100.

It measures the return on capital employed in the business. It reveals the efficiency of the business in utilisation of funds entrusted to it by shareholders, debenture-holders and long-term loans. For inter-firm comparison, return on capital employed funds is considered a good measure of profitability. It also helps in assessing whether the firm is earning a higher return on capital employed as compared to the interest rate paid.