Video: Return on Investment

In this lesson, Nick Palazzolo, CPA, demystifies the concept of Return on Investment (ROI), a fundamental financial performance metric. He walks through the basic ROI formula, highlighting net income divided by invested capital, and explains the components of the calculation, such as profit margin and investment turnover. Nick not only stresses the importance of understanding and memorizing this formula—crucial for the exam—but also offers insights into how ROI reflects a company's efficiency in generating profits from its investments. By breaking down the formula into more digestible parts, he ensures that one knows not just the 'what,' but also the 'why' and 'how' behind it, laying the groundwork for smarter investment strategies and better financial decisions.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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ROI, return on investment. And you remember from probably say it in various lessons at this point. I feel like I say it all the time. No, not inflows and outflows. Although I do say that a lot as well. Return on generally means net income in the numerator. And we'll look at here. Income. Net income. So, ROI, what's your return on investment? So it's net income divided by invested capital, or investment capital, however you want to say it. I just, like, contradicting myself, don't I? How much money are you making per? What did you put in? I did say I wasn't going to say it, but you can really say this is inflows divided by outflows. But oh, man, I said it, didn't I? Okay, and what's another way to say that?

Now, this formula, you can see there's just a bunch of ways to say ROI and memorize it for sure. ROI equals income divided by invested capital, also equals profit margin times investment turnover. Well, other than drilling down into profit margin, we've got profit margin. Well, that's net income divided by sales, which is really just sales minus costs divided by sales. And then investment turnover is sales divided by invested capital.

Nothing crazy here. These formulas, you should know, memorize them, this could significantly help you on the exam, getting you those into freepoint territory. So this ROI can be broken down, disaggregated into these particular formulas, right? They could give you, say, what's, the ROI? And it might give you revenue, it might give you expenses, might give you invested capital, and there just work your way up through the flow chart.

Talk about ROI. The higher the percentage return, the better. Pretty much makes sense, right? You want a higher ROI because you

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