Meaning: It is the ratio of net profit before interest and tax and total investment.
Significance: The significance of computing this ratio is to find out how efficiently the long term funds supplied by the outsiders or creditors and owners are being used.
It gives an indication of how the total money is being used.
Example:
If an entrepreneur spends ₹ 100,000 to open a grocery shop and makes a net profit of 20,000 in one year, your annual ROI equals (20,000/100,000) ×100 = 20 percent.
When calculating ROI, the investment will include not only what the investor spent out of his/her pocket, but also all borrowed funds.