The term “Investment” here refers to long term funds deployed in the enterprise. As defined earlier long term funds are also known as Capital Employed which means total of shareholders funds and long term loans.
The ratio is computed as under :
Returns on Investment =\(\frac {\textit{Profit before Interest Tax and Dividends}}{\textit{Capital Employed}} \times100\)
Since the capital employed includes shareholders funds and long term loans, interest paid on long term loans will not be deducted from profits while calculating this ratio.
Capital employed can be computed by any of the following two methods :
First Method (Liabilities Side Approach)
Capital Employed = Equity Share Capital + Preference Share Capital+All Reserves + P&L Balance + Long Term Loans – Fictitious Assets (such as Preliminary Expenses etc.) – Non- Operating Assets like Investments made outside the business
Second Method (Assets Side Approach)
Capital Employed = Fixed Assets + Working Capital or Fixed Assets + Current Assets – Current Liabilities
