Yield or the income return on investment
represents interest or dividends
acquired from a security. Annually, it is expressed as a percentage, based on the current market value or the
investment cost.
In different situations, the term has different meanings. For example, it may be calculated as a ratio or as an
IRR (internal rate of return), stating the total return of the owner or just a part of the income. The different
meanings show that the yields can not be compared as thought they are equal.
The return on investment measures the cash made or lost in the course of the investment. The measurement shows
the income steam or the cash flow resulting from the
investment which is relative to the invested amount. The cash flow may take the form of a profit, dividends, interest, or capital
loss/gain. The last is observed when the market or the resale value of the investment increases or decreases.
The return on invested capital is not included in the cash flow.
Normally used for financial decisions of personal nature, the ROI
values include the Annualized Rate of Return and the Annual Rate of Return. The effects of
compounding/reinvesting are considered as Certificates of Deposit or savings
accounts. The effects of capital loss/gain
and price volatility for investments in which capital is at risk are considered by the investor. Examples are stock shares, home purchases, and mutual fund shares.
ROI is also employed in profitability ratios used by analysts for comparing profitability among companies or
just the overtime companys profitability. These include Operating Profit Margin, Gross
Profit Margin, Dividend Yield, ROI ratio, Net profit margin, Return on asset and Return on
equity.
To select which project to pursue, companies compare the ROI of different projects during the capital budgeting.
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