Return On Investment (ROI) is an accounting formula.

Because the numerator, or Net Income is an unreliable measurement, the result of the formula for ROI must also be unreliable to determine success. Although the ROI formula still shows up in many annual reports…

The degree to which Return On Investment (ROI) overstates the economic value depends on at least 5 factors:

1. Length of life (the longer, the larger the overstatement)

2. Capitalization policy (the smaller the fraction of total investment capitalized in the books, the greater will be the overstatement)

3. The rate at which depreciation is taken in the books (the depreciation rate drops faster than straight-line and will result in a higher ROI)

4. The time between the date of the investment and the payback of the investment from cash inflows (the greater the time, the greater the degree of overstatement).

5. Companies that grow to fast will more than likely have a lower Return On Investment.

Formula: Net Income / Value of Assets = ROI

Income / Value of Assets = ROI

(Better) alternative:
Net Income+Interest (1-Tax Rate) / Book value of Assets = Return On Investment