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Financial analysis tools: Here's what you need to know about a return on investment analysis

by , 03 September 2014
You must analyse your company's financial statements regularly so you'll be able to see problems that exist or may soon exist.

Now there are three financial analysis tools you can use to do this. They are:

1. Profitability analysis;
2. Return on investment analysis; and
3. Risk analysis.

For the purposes of this article, we'll focus on the return on investment analysis because it's a crucial yet often misunderstood tool.

Here's what you need to know about a return on investment analysis so you can analyse your financial statements effectively.


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Financial analysis tools 101: Return on investment analysis explained 


Return on investment analysis focuses on the profitability of your investment over a given time frame.

This analysis is important because it allows you, the investor, to review how an investment is performing. If an investment is performing well, you may decide to invest more resources in it and if it isn't doing well, you may decide to take money out or find out the reasons why it's performing badly.

If you're still not convinced about the importance of a return on investment analysis, imagine this…
 

Imagine for a moment that you have two investments. One investment has achieved a healthy return, the other has made a substantial loss on the original investment.

Without performing return on investment analysis, you might not know which one is performing and which isn't. You wouldn't be able to investigate the poor performer or reward the good performer with additional investment.

As you can see, return on investment analysis is crucial.

We've just scratched the surface regarding this topic, to find out more information (e.g. the five analytical tools you can use to measure return on investment), check out the Practical Accountancy Loose Leaf Service.
 
Now that you know about the return on investment analysis, analyse your company's financial statements effectively.
 

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