Calculate ROI and interpret it correctly: How to make well-founded investment decisions

Calculate ROI and interpret it correctly: How to make well-founded investment decisions

The most important points at a glance

• The ROI measures the profitability of an investment and enables the comparison of projects
• The calculation is simple, but the decisive factor is the correct differentiation between profit and costs
• Incomplete costs and unrealistic assumptions frequently lead to distorted results
• A high ROI is only meaningful in the context of risk, capital commitment, and time horizon
• For well-founded decisions, ROI should be combined with metrics such as net present value and cash flow

What is Return on Investment (ROI)?

Return on Investment (ROI) is a metric that shows how profitable an investment is in relation to the capital employed. It helps companies make investments comparable and take well-founded decisions. In controlling, ROI serves as a central steering metric for efficiency and capital utilisation.

As a relative metric, ROI makes visible how efficiently the capital employed is used economically. This makes it possible to quickly assess whether an investment is economically worthwhile.

For CFOs, CEOs, and fiduciaries, ROI is particularly relevant because it:

• makes investments comparable
• makes the efficiency of projects visible
• serves as a basis for strategic decisions

In practice, ROI is used both for individual projects (e.g. software implementation, marketing campaign) and at company level.

One important point: ROI is a relative metric. This means it shows a return in percent – not the absolute profit. This makes it particularly suitable for comparing different investments.

Positioning ROI within the KPI system

In controlling, ROI is often used in conjunction with financial accounting and cost accounting. A clean data basis is crucial.

How is ROI calculated?

The calculation is based on the logic already described. The metric thus shows how efficiently an investment works. The decisive factor is that both profit and investment base are defined consistently and correctly.

The classic ROI formula is:

ROI = (Profit / Investment costs) × 100

In practice, however, there are several variants, depending on the perspective taken. Instead of net profit, operating profit (EBIT – Earnings Before Interest and Taxes) is often used in order to better reflect operational performance.

The decisive factor here is how profit and capital employed are delineated. Different definitions lead to different results – and thus to potentially wrong decisions.

Typical variants in practice:

• Project ROI: focus on individual investments (e.g. IT project, marketing campaign)
• Company ROI: view of the overall profitability of the capital employed
• Operating ROI (DuPont logic): linking margin and capital turnover

For Swiss SMEs it is particularly important that the calculation is based on consistent data from financial accounting and cost accounting. Only then can investments be sensibly compared.

A common mistake is mixing:

• gross and net figures
• one-off and recurring effects
• operating and financial results

“In practice, the meaningfulness of ROI rarely fails because of the formula, but almost always because of how the underlying variables are delineated,” explains finance expert Urs Rindlisbacher.

Which costs must be included in the ROI calculation?

For a correct ROI calculation, all relevant costs must be fully recorded. This includes not only obvious investment costs, but also indirect and ongoing expenses. An incomplete cost base distorts the result and often leads to an overestimation of profitability.

In practice, costs are often underestimated or not clearly delineated. Particularly in projects such as digitalisation, software implementations, or process optimisation, additional expenses arise that are not directly visible in the investment.

In principle, the following cost categories should be taken into account:

• Direct investment costs: acquisition costs, external services, project costs
• Indirect costs: internal effort, training, project management
• Ongoing costs: maintenance, operation, licence fees
• Opportunity costs: foregone alternative returns due to capital commitment

For a robust calculation, it is crucial to clearly differentiate between the following types of costs:

• one-off investments
• recurring costs
• and internal resources

A common mistake is not taking internal efforts (e.g. employees’ working time) into account. As a result, profitability is systematically overestimated.

Another critical point is opportunity costs. Capital tied up in an investment is not available for alternative projects. This effect is ignored in many ROI calculations, even though it is central to decision quality.

For practical purposes this means: the more complete the cost base, the more robust the ROI.

What does an ROI calculation look like in practice?

An ROI calculation in practice follows a clear logic: investment costs are compared with expected or actual profits. The crucial factor is not the formula itself, but the clean derivation of the underlying figures.

A typical example from a Swiss SME:

A company invests CHF 100,000 in a new software solution to automate processes. This results in annual savings of CHF 30,000 in personnel costs.

The simplified calculation:

• Profit (annual): CHF 30,000
• Investment: CHF 100,000
• ROI = 30%

At first glance, the investment seems attractive. In a practical application, however, it becomes clear how much additional efforts and timing effects can change the result:

• one-off implementation costs (e.g. training, integration)
• ongoing licence costs
• internal project effort
• time delay until full impact

If, for example, an additional internal effort of CHF 20,000 is taken into account, the ROI changes significantly.

Typical approach in practice:

• fully define the scope of investment
• record all relevant costs (including indirect costs)
• make realistic benefit assumptions
• calculate and validate ROI
• compare scenarios (best case / worst case)

Especially in controlling, it is common not to work with a single ROI value, but to calculate several scenarios. This makes it easier to assess how robust an investment is in the face of uncertainties.

Important: an isolated snapshot is rarely sufficient. ROI should always be viewed over time and regularly compared with actual results.

What mistakes frequently occur in ROI calculation?

The most common mistakes in ROI calculation are not due to the formula itself, but to incomplete data and incorrect assumptions. As a result, ROI is often presented too optimistically and leads to wrong decisions.

A central problem lies in the insufficient representation of all relevant efforts. Errors usually arise where individual cost components are methodically excluded or considered too late. Typically, the following elements in particular are incompletely taken into account:

• internal efforts (e.g. working time)
• integration and implementation costs
• ongoing operating or maintenance costs

A second critical point is unrealistic assumptions. Forecasts of savings or additional revenues are often set too optimistically. Without clear derivation or scenario calculations, ROI quickly loses its significance.

Equally problematic is the lack of time reference. Classic ROI does not take into account when profit is generated. Two investments with identical ROI can therefore be economically completely different – depending on how quickly the benefit is realised.

Other typical mistakes in practice:

• mixing one-off and recurring effects
• using inconsistent profit definitions (e.g. EBIT vs net profit)
• failing to take risks into account
• comparing projects with different terms

For CFOs and fiduciaries, this means:
The quality of the result stands and falls with the underlying assumptions.

In practice, it has proven useful to review every ROI calculation with the following questions:

• Are all costs fully recorded?
• Are the assumptions realistic and documented?
• Are there alternative scenarios?

This plausibility check is crucial to avoid misinterpretation and make sound decisions.

How is ROI correctly interpreted?

ROI shows how profitable an investment is – but only correct interpretation turns it into a reliable basis for decisions. The percentage value alone does not provide a decision basis; it must always be evaluated in the context of risk, capital commitment, and strategic objectives.

A positive ROI basically means that an investment creates added value, while a negative value indicates an uneconomic decision. However, the decisive factor is under which assumptions this value is generated and how stable the underlying effects are.

In practice, several factors play a role at the same time. For example, a high ROI can be associated with considerable risks or based on short-term effects that are not sustainable. Likewise, an investment with a lower ROI can be more sensible in the long term if it is predictable and contributes strategically to the company’s development.

A typical comparison illustrates the issue clearly: an investment with 25% ROI can be less attractive than one with 15% if the higher return is based on uncertain assumptions or requires a longer capital commitment.

For CFOs and fiduciaries, this means: ROI is not an isolated decision value, but an instrument for classification. Only in conjunction with liquidity, risk, and strategic relevance does a complete picture emerge.

“An isolated ROI value rarely leads to a good decision – only in the context of risk, liquidity, and strategic objectives does it become truly meaningful,” says Urs Rindlisbacher.

What is a good ROI?

A “good” ROI cannot be defined in general terms. Whether a return is attractive depends heavily on the industry, risk, cost of capital, and strategic context. A single percentage says little about the actual attractiveness of an investment.

In practice, rule-of-thumb values often circulate – for example, 5–10% is considered solid and 10–15% or more as attractive. Such benchmarks can provide an initial orientation, but should be interpreted with caution. They take neither the specific situation of a company nor the individual risks of an investment into account.

The decisive factor is how the return compares with alternative uses of capital. An ROI is good if it:

• is above the company’s cost of capital
• is more attractive than alternative investments
• fits the company’s risk and strategy profile

Especially in the SME environment in Switzerland, capital availability also plays an important role. An investment with a moderate ROI can be more sensible than one with a high return if it ties up less capital or releases liquidity more quickly.

Another important aspect is consistency: a one-off high ROI is less relevant than a stable, plannable return over several periods.

For practical purposes this means:
A “good” ROI is not a fixed value, but the result of a well-founded classification in the company context.

When is ROI not sufficient as a metric?

In certain decision-making situations, ROI shows only part of the overall economic picture. In particular with long-term, complex, or high-risk investments, it alone does not provide a complete decision basis.

A key problem is the lack of time reference. ROI does not show when profit is generated. Two investments with the same ROI can therefore be economically very different – depending on whether the return occurs after one year or only after five years.

Liquidity is also not reflected in classic ROI. An investment may be profitable on paper but still lead to bottlenecks if it ties up a lot of capital or generates returns only with a delay.

In addition, risks are only indirectly or not at all represented. ROI is based on assumptions – and the more uncertain these are, the less reliable the result becomes. Particularly for growth projects or innovations, ROI can therefore present a distorted picture.

Typical situations in which ROI is not sufficient are:

• long-term investments with delayed benefits
• projects with a high degree of uncertainty
• investments with a strong impact on liquidity
• strategic initiatives whose benefits are not purely financially measurable

For CFOs and fiduciaries, this means: ROI is a useful starting point, but should never be used in isolation. Only in combination with additional metrics and a qualitative assessment does a sound decision basis emerge.

Which metrics are an alternative to ROI?

ROI provides an initial classification but does not cover all decision-relevant aspects. In practice, it is therefore supplemented by additional metrics that take further perspectives such as time, liquidity, and risk into account.

One of the most important additions is net present value (NPV). This takes account of the time value of money and shows what absolute added value an investment generates over its lifetime. In contrast to ROI, net present value thus provides a clear statement as to whether an investment actually creates value.

Internal rate of return (IRR) is also frequently used. It indicates the annual return an investment achieves and thus enables a direct comparison with the cost of capital or alternative investments.

The payback period (payback method) adds the time factor to this perspective by showing how long it takes for an investment to pay for itself. Especially in the SME environment, this metric is closely linked to liquidity planning.

While ROI is based on an earnings figure, cash flow shows the actual cash flows and thus the immediate impact on liquidity.

In investment appraisal, a robust overall picture only emerges from the combination of several metrics. Profitability, time reference, and liquidity are systematically brought together.

Comparison of key investment metrics

In practice, it has been shown that in particular the combination of ROI, net present value, and cash flow provides a robust basis for decisions. While ROI reflects the efficiency of an investment, net present value shows its actual added value, and cash flow makes the impact on liquidity transparent.

How is ROI used in controlling in Swiss companies?

In the controlling of Swiss companies, ROI is primarily used as a decision-making and steering instrument. It helps to evaluate investments, set priorities, and make the efficiency of the capital employed transparent. Its strength lies in the comparability of different projects and measures – regardless of company size or industry.

In practice, ROI is closely linked to financial accounting and cost accounting. For ROI to function as a steering metric, the underlying data must be collected and delineated consistently. Particularly in larger or decentralised organisations, a standardised methodology is central for ensuring comparability.

Typical areas of application are the evaluation of investments in:

• infrastructure and plants
• IT and digitalisation projects
• marketing and sales initiatives
• efficiency and transformation programmes

In addition to the individual evaluation of projects, ROI is also used in management reporting to measure the performance of business units, investments, or strategic initiatives and compare them with the original expectations. In practice, however, it becomes apparent that isolated metrics are often only of limited significance. Only by linking them with other financial metrics does a robust overall picture emerge, for example through structured reporting solutions such as Analise Franci.

A key added value lies in prioritisation: companies can deploy capital specifically where the greatest impact is expected. This is relevant both for growing SMEs and for larger, more structured organisations.

In practical application, it becomes clear how differently investments need to be evaluated depending on structure and objectives. Only in conjunction with budgeting, forecasting, and liquidity planning does a complete steering picture emerge – especially for more complex investment decisions.