Return on Investment (ROI) can be calculated using the DuPont formula. It uses the net profit margin and total asset turnover in the calculation of ROI. These measures indicate how effectively a company uses each dollar that is invested in assets to generate profits. It is fairly easy to learn how to calculate each of these components and the overall ROI.
Locate the data for the "net profit after taxes" and "revenue" line items in the income statement.
Divide the net profit after taxes number by the revenue number and multiply by 100 to calculate the net profit margin. Net profit margin indicates how many dollars in profit are made per each dollar that is produced in revenue.
Locate the data for "total assets" in the balance sheet. Divide the revenue number by the total assets number and multiply by 100 to calculate asset turnover. Total asset turnover indicates the amount of sales that are generated for every dollar invested in assets.
Multiply net profit margin by the total asset turnover to calculate return on investment.
Shreya Mehta graduated from the University of Massachusetts with a Bachelors degree in business administration with a double concentration in finance and MIS. She attended Bentley College to obtain a MBA in finance and Masters in IT. She has been working for a financial software company for the past three years as an associate content manager.