Definition: Return, also called return on investment, is the amount of money you receive from an investment. You can think of it this way. For every dollar you put into an investment, the investments earns two dollars. This money that the investment earns is considered your return.
What Does Return Mean?
A return is often calculated as a percentage or ratio of the original investment, so that managers can measure and compare how well their investments are performing. Amount of return depends on a lot of different things, but the main driving force is risk. Typically high-risk investments reap a higher rate of return than low risk investments.
When most people here the word investments, they naturally think of stocks and bonds. They can be investments, but the true definition of an investment is something that you put money into and expect some type of return. Companies invest money into equipment, real estate, patents, processes, trademarks, and machinery. All of these are considered investments to companies because they put money into them and expect to make money from them.
Managers use financial ratios like the return on assets, return on equity, and even the return on inventory to measure how well their investments are doing. These ratios calculate the return as a percentage of the investment total. For example, the return on assets ratio is calculated by dividing the income from the new assets by the newly invested assets. This shows the income or return from the assets as a percentage of the assets.
Obviously, managers will study the ratio trends and tend to invest money in assets with higher return rates. This ensures the company will keep making money every time it decides to expand its operations and invest in new capital projects.