The invested capital. Return on invested capital

The main task of investment is to obtainmaximum income from invested funds. In order to predict the probable profit and assess the financial performance of the project, various mechanisms are used. In this article we will consider the profitability of the invested capital and find out how and with what mechanisms it is correct to calculate it.

Invested capital

Under the concept of invested capital is understoodthe amount of funds allocated for the implementation of the project, the development of production of goods and services in order to obtain the maximum possible profit. In this case, the sources of investment can be internal or external.

Among domestic means of investment,to allocate a part of the net profit, which is directed to the implementation of financed projects. External, or borrowed, funds include resources, the use of which is associated with the subsequent withdrawal of part of the profits to pay off these investments.

The first option involves investing a sharereceived profits in the development or improvement of production, as well as increasing the efficiency of labor. This, in turn, leads to an increase in revenues from goods and services sold. Borrowing from external sources often consists of bank loans or the attraction of partner funds.

It should be noted that investment capitalconsists of several structural units. These include tangible assets, financial assets, as well as intangible funds. Among the first belong, for example, land and real estate. Financial assets include shares, debentures and parts in other enterprises. Intangible assets are such actions aimed at increasing business, as increasing the presence in the market or conducting marketing research.

Return on invested capital

One of the main places in the field of investmentthe index of profitability of the invested capital. This parameter shows how effective is the investment of own or borrowed funds in the investment object. The objective of any business is to increase the company's market share, gain financial stability, and also to engage in new free niches of production and sales of goods and services. The profitability of the invested capital is a convenient parameter for the indication of these processes.

Coefficient of profitability

To determine profitability, it isuse the ROIC (Return of Invested Capital) ratio. It should be noted that the index belongs to the category of indicators of efficiency of use of tools such as total assets, shareholders' equity, gross and operating profit. The formula for calculating this coefficient is as follows: income - cost / amount of investment.

Why do you need a profitability ratio?

It should be emphasized that the definition of the coefficientprofitability of the invested capital before investing money in the project makes it possible to find out how expedient the primary investment is in a particular situation. In addition, in many enterprises, economists use ROIC ROI to understand the need for investment as such.

With return on invested capitalInextricably linked such a factor as payback. It is this indicator that indicates the period of time for which the invested funds will bring the expected income. The payback is affected by several circumstances, including macroeconomic indicators, as well as the characteristics of a specific branch of the national economy.

In conclusion, mention should be made of the mainadvantages and disadvantages of calculating profitability. The plus is a fairly simple method of calculating the ROIC. As mentioned above, for this it is sufficient to know the value of the probable profit and the amount of investments to be invested. The main disadvantage of calculating profitability can be called the presence of errors caused by the presence of unaccounted financial actions.

However, for small business and not too large investment projects, the formula for calculating the return on invested capital is certainly sufficient.