Return on Investment

The return on assets is a key financial ratio in financial statement analysis because it shows how effectively a company is able to generate profits based on the total capital invested in its operations. This figure helps lenders, suppliers, and business partners assess how well a company is performing financially and, consequently, how much risk is associated with doing business with it.

What does return on investment mean in practice?

The return on assets ratio expresses the relationship between a company’s operating profit and the capital tied up in assets such as machinery, inventory, equipment, and financing. A high ratio indicates that the company is able to utilize its resources efficiently, while a low ratio may signal poor profitability, high capital tied up in assets, or emerging financial challenges.

For business partners and creditors, this key figure can therefore serve as an early indicator of whether the company can meet its obligations—a factor that is crucial for credit decisions, payment arrangements, and the risk of loss.

Formula for the return on investment

The return on investment is typically calculated as follows:

Return on Assets = (Income Before Interest × 100) / Total Assets

Earnings Before Interest (EBIT) reflects operating income.
Total assets include all capital invested in the company—both equity and debt.

Some use net income after taxes, but the principle is the same: to measure how effectively capital is being utilized.

Example

A company has the following figures:

Earnings before interest: 400,000 DKK
Total assets: 1,600,000 DKK

Calculation:

(400,000 × 100) / 1,600,000 = 25%

This means that the company generates 25 øre in profit for every krone tied up in assets.

When is a return on investment “good”?

There is no universal standard, because the key ratio varies depending on the industry, capital structure, and business model.

Typical guidelines:

Capital-intensive industries (manufacturing, transportation) → 8–12% is typical
Service and consulting firms → often 15–25%
Retail → depends on inventory turnover and tied-up inventory

As a general rule, the rate of return should exceed the market interest rate—otherwise, the capital could have yielded a better return through alternative investments.

Why is the return on investment relevant to creditors and the debt collection industry?

When suppliers, banks, and business partners assess a company’s financial strength, they often look at the return on investment because it:

shows whether the company generates enough value to meet its obligations
reveals trends in operations—such as rising costs or declining revenue
may indicate payment risk in both the short and long term

In debt collection and accounts receivable management, the return on investment is used as a supplement to payment history, capital structure, and liquidity when assessing the likelihood that a company can repay its debt or meet a payment agreement.

Return on Investment vs. Profit Margin

Although these key figures are often mentioned in the same context, they do not measure the same thing:

The return on capital ratio shows how effectively the company utilizes its total capital.
Profit Margin shows what percentage of revenue ends up as profit.

These two figures are often used together to provide a more complete picture of the company's profitability.