Take one business ratio. For this ratio, you should:

1. Give a very detailed account of what this ratio is measuring. I don't mean just its input values or the formula, but the underlying business situation or factor that it is measuring.

   ANSWER: Return On Investment (ROI) compares the amount of money that investment brings into your business to how much you paid for the investment. ROI can be used to look at past and potential financial returns. ROI shows you the money you invest and the profit that you get back from it. The formula is as follows (Earnings-Initial Cost of Investment)/Initial Cost of Investment OR Net Profit/investment x 100. As your ROI goes up, the more your investment turns into income.
2. Discuss how this ratio should be used in analyzing a firm, and how it plays a role in the broader understanding of the financial condition of the firm. You should also describe its relationship to other, similar ratios. ANSWER:How ROI can be used to analyze a firm is that a well-run business will closely pay attention to ROI, if a firm’s ROI is not at the level that they are looking for and they continue to put money into it then you are mismanaging money. There is no reason to spend money operating on a loss. ROI allows you to track and analyze short- and long-term projects as well as evaluate a business’s financial performance. A similar, more detailed ratio is an Internal Rate of Return (IRR) which considers the timing of the cash flow and gives you a lifetime rate of return. There is also Return on Equity (ROE) and Return on Assets (ROA) which take more of a detailed look at equity and assets compared to ROI which only looks at a broader return.

3. Give some concrete examples using real data. (You can access financial statements through Edgar.)

4. Interpret the significance of your calculations for those concrete examples.

5. Describe how this ratio may be misleading or incorrectly interpreted.