Environmental policy has a shorter history in the EU than cooperation on business and industry. But despite a late start, it has been a success. Every decision on tightening leads to improvements in so many countries that the overall effect is great.

Through the Amsterdam Treaty of 1999, the principle of sustainable development became a fundamental goal of the EU. This means that in all decisions made at EU level, environmental considerations must be taken into account and any environmental impact examined.

Two principles in the environmental field must be guiding. One is the precautionary principle, which states that if a product is not proven harmless, it should not be approved. The other is called “the polluter pays” and means that the company, industry or industry that causes environmental damage must bear the costs.

Short for European Union by abbreviationfinder, the EU sets multi-annual environmental programs. The current program runs until 2020 and has three main objectives: protecting and conserving the EU’s natural resources, making the EU a resource-efficient, green and competitive ‘low-carbon economy’, and protecting EU citizens from environmental and health hazards. One of the larger projects is to make the economy “circular”, which means to take in environmental effects already when designing a product or service, in the form of environmentally friendly materials, packaging requirements, final recycling, etc.

The EU’s success in environmental policy includes the regulation of chemicals, which forced a review of all chemicals on the market. The most dangerous ones were banned immediately, in any case there is a less dangerous alternative, the more dangerous versions are banned and all other chemicals must be registered so that the use can be documented.

The department’s mixed success includes the protection of biodiversity. About 20% of the EU’s area has been set aside as natural areas where flora and fauna are to be protected. Despite this, work is too slow to save many plant and animal species from extinction.

The failures of environmental policy must include the fact that emissions from the transport sector have not been able to be reduced despite EU legislation, but on the contrary have increased since 1990. This applies to both road transport and aviation.

The EU has also regulated water and air quality, adopted a strategy for waste management and is working against disturbing noise.

The climate

In 2006, the EU adopted the world’s toughest package of measures to reduce climate change. In 2016, the EU had already exceeded the first of its four climate targets for 2020 – to reduce carbon dioxide emissions by 20 percent compared to 1990 (the reduction was then 23 percent). The target has now been raised to a 40 percent reduction by 2030.

The second goal also seems to be realized; that 20% of the energy consumed in the EU should be generated from renewable energy sources. The EU used 17 percent renewable energy in 2017. The new goal will be to reach 27 percent by 2030.
The third goal – to get the vehicle fleet to run on 10 percent renewable fuels – is possibly within reach thanks to the popularity of electric cars (7.1 percent in 2016).
The fourth goal is also considered to be entirely possible; to reduce energy consumption by 20 percent compared to 2005. In 2016, EU countries had saved more energy than the set target (2 percent over), but a couple of cold winters lowered that result somewhat.

The target for 2030 will be 30 percent.

Within the UN circle, the EU has had mixed success in getting the rest of the world to agree on a global climate agreement. The agreement in Paris in 2015 won many supporters, including the largest emitting countries, the United States and China, but in 2018, US President Donald Trump decided that the United States will not implement its commitment.

However, researchers believe that the Paris Agreement has given too little and come too late to meet the UN’s ambition to keep global warming below 2 degrees. Despite this, the UN Climate Panel said in the autumn of 2018 that the world can still save the situation, but then many, new measures must be taken and it must happen quickly.

Energy

Energy is a hot political issue in several ways. It is about securing access to energy in a world where resources are declining and demand is increasing. It is also about the climate because oil, coal and natural gas are responsible for the largest emissions of greenhouse gases. Finally, security policy is affected because EU countries have to import 54 percent of their energy, mainly from Russia and the Middle East.

The EU has long sought to create a common energy market. Gradual deregulation in the mid-2000’s, for example, forced dominant energy companies to open up their networks to competitors and gave customers the right to buy energy from non-domestic producers.
It was not enough to create a cohesive market. In Denmark, for example, people are still forced to close their wind turbines during particularly windy days. The surplus electricity should be able to be sold to northern Germany, where coal-fired power plants are operating at full capacity, but there is a lack of lines between the countries.

The EU has therefore directed regional aid and special energy allocations to infrastructure projects that connect the countries’ energy connections. New lines now link, for example, Sweden, the Baltics, Poland and Germany, while others connect Spain and France.

With the Treaty of Lisbon, energy policy became more of a common concern for EU countries. With the support of this, EU leaders gathered in 2015 for a decision on a European Energy Union. More energy networks are being expanded across borders, new technology enables smarter energy use and competition between energy companies has intensified through clearer pricing. In addition, the member states have committed themselves to help a country in solidarity in the event of an acute energy crisis.

However, energy remains a shared competence between the EU and the member states. The states retain control over important parts of energy policy such as energy taxes, the right to decide which energy sources they want (nuclear power is rejected in some countries and appreciated in others) as well as the right to conclude their own energy agreements with third countries.

The European Commission has tried to have the last word on energy agreements with third countries, in order to be able to slow down agreements that increase the EU’s dependence on imports. But EU countries have only agreed to inform Brussels in advance.

Example of a SWOT analysis

A clear SWOT analysis example is the case of a fictitious library, whereby the objective for the sake of simplicity is simply the determination of any need for action. One of the strengths is undoubtedly the high level of information and media skills of the employees. Weaknesses, on the other hand, are the lack of innovation in such an institution and the associated rather old-fashioned image, as well as low financial resources.

Opportunities, on the other hand, are the general appreciation of a library as a place of learning, especially against the background of the increasingly important lifelong learning. In addition, individualization represents an opportunity to develop a monopoly position. Risks, on the other hand, arise from the universally accessible internet offer and, above all, from the diverse range of eBooks, which means that libraries generally enjoy added value.

An example of an avoidance strategy (weaknesses combined with risks) would be the implementation of a fundraising event to purchase a large internet area that is accessible to all – especially with introductory courses for senior citizens. This acts on the weaknesses mentioned and effectively cushions the risks mentioned.

Tools for SWOT analysis

Nowadays there are a number of aids and tools that serve as a template for a SWOT analysis or carry it out in general. An example of this is the publication “The TOWS Matrix – A Tool for Situational Analysis” by Heinz Weihrich, published in 1982. This provides an orientation for the situation analysis as a central part of the entire SWOT analysis.

Apart from that, it should be mentioned that the matrix listed here is already one of the most common tools and can be created by anyone. Apart from that, however, it is indeed advisable to use external service providers who have specialized in such areas for the analysis of the external factors.

Advantages and disadvantages of the SWOT analysis

According to WHOLEVEHICLES.COM, the advantages and opportunities of the SWOT analysis have already been indicated several times. It is a flexible instrument for determining the location of a company within the economic or cultural situation and in comparison to other competitors. Another plus is that a SWOT analysis develops strategies which selectively target the improvement of grievances or the defense against threats. With all of this, users benefit not least from the transparency and clarity of such data collection.

A disadvantage of a SWOT analysis, on the other hand, is that it is a snapshot, so that regular renewal is necessary. In addition, there is a high research effort and the results are always dependent on the factors that you have found or determined yourself. There is therefore always a certain degree of subjectivity.

Common mistakes when doing a SWOT analysis

While a SWOT analysis offers a large number of opportunities and advantages, it should also be mentioned that there is a certain potential for error in the creation. It is precisely this that needs to be considered in advance and the work processes to be optimized accordingly. Common mistakes include:

• Performing a SWOT analysis without a clearly defined goal
• Confusing internal strengths with external opportunities
• Confusing the actual SWOT analyzes (states) with the possible strategies / necessary actions (actions)
• Missing prioritization during the SWOT analysis and thus stagnation in the derivation of strategies and measures

Alternatives to the classic SWOT analysis

As mentioned, the SWOT analysis is associated with a certain amount of effort, especially in terms of the necessary research and the participating staff. In addition, it is the case that such an analysis is generally based on a highly rational view of the respective conditions and, as a rule, equally rational strategies and measures are taken. This is one of the risks of a SWOT analysis.

Therefore, it should not go unmentioned that sometimes alternatives in the sense of a more reactionary and dynamic approach are valued. Marketing in particular plays an important role, with the aim of analyzing public perception and customer opinions in as much detail as possible. This ultimately results in any necessary actions to improve the position of a company or to optimize productions and work areas.

Conclusion

The definition of the SWOT analysis results from the acronym of the title. Strengths (strengths), weaknesses (weaknesses), opportunities (opportunities) and threats (risks) are taken into account in this analysis and, in combination with one another, enable promising strategies. These can either go in the direction of a mere increase in profit or mean an effective defense against possible threats. Decisive for the meaningfulness of a SWOT analysis is always the objective to be defined in advance as well as the success control afterwards by means of key figures.

In order to carry out all the actual analysis, little technical effort is generally required, but human resources and a certain amount of research are required. As a tool or basis for the analysis itself, a simple matrix has proven itself, in which the internal strengths and weaknesses as well as external opportunities and risks are linked.

The SWOT analysis convinces users not least because of its simple and flexible usability. This applies, among other things, to companies, companies, non-profit institutions or even individuals. Depending on the reference, this results in, for example, a marketing instrument, a measure for general business planning or an opportunity for very individual career planning and personality development.

The SWOT analysis, by definition and reference to the term itself, is the analysis of the strengths, weaknesses, opportunities and risks of a company, an organization or the like. It thus functions as a practical instrument for the strategic planning of these very institutions.

Detailed definition and development of the SWOT analysis

But what exactly does SWOT analysis mean? SWOT is an acronym for the English terms Strengths, Weaknesses, Opportunities and Threats. The analysis looks at precisely these aspects individually and in connection with one another in further application.

According to WHICHEVERHEALTH.COM, a SWOT analysis is used, for example, when a company wants to establish itself or already exists and intends to expand its influence or its success. The structure of the analysis is, according to the points mentioned, relatively simple. For example, very rational and direct questions arise:

• What are the strengths of the company, the company, etc.?
• What are the weaknesses, however?
• What opportunities does the market offer?
• What are the risks against it?

The first question is used to identify your own strengths. What distinguishes a company, what are its particular strengths, how was the current position achieved and are there even unique selling points?

On the other hand, there are weaknesses. This includes in particular features where competitors obviously do better work, but also general grievances. Likewise, only moderately or not yet fully completed fields of activity are to be taken into account, which actually belong to the general standard of the industry (for example in a library a non-existent internet connection).

Circumstances that open up through external influences and open up opportunities for the institution are to be seen as opportunities. These could be changes in the law, new technological innovations or emerging trends. This also includes the disappearance of a competitor.

In contrast to the opportunities, ultimately, the risks are decisive. This refers to changes that also happen from outside. In this respect, for example, changes in the law and cultural or economic trends are also included here. Furthermore, high competition from other institutions or, in some cases, technological innovations represent a risk. (The library, for example, includes today’s extensive online offer and eBooks.)

Who Invented SWOT Analysis?

Nowadays, the SWOT analysis stands for a systematic situation analysis with which companies, organizations and so on work. Especially in the business plans of a company or a company, the analysis appears nowadays mainly to plan economic success. The SWOT analysis is also a common instrument in marketing.

In fact, however, the origin of the analysis lies in pre-Christian China. A reasoning quote comes from the Chinese general, military strategist and philosopher Sunzi: “If you know the enemy and yourself, you do not need to fear the outcome of a hundred battles.”

The basic idea of ​​the SWOT analysis can already be seen in these sentences. Sunzi therefore recommended knowing yourself, i.e. your own strengths and weaknesses, and also looking at the enemy, i.e. the opportunities and risks facing you. Both aspects in relation to each other ultimately enable a prognosis of success and failure.

The bridge from this metaphorical point of view to actually applicable analysis was built in the 1960s at Harvard Business School. Henry Mintzberg, a Canadian professor of business administration and management, developed the SWOT analysis as a basis for formalizing processes of a company’s strategy development.

What can a SWOT analysis do?

Although the history of the development may seem impressive, the question that certainly arises for entrepreneurs, start-ups and similar institutions is: What is the point of a SWOT analysis? What are the benefits of the sometimes time-consuming process of analysis from an economic point of view?

The analysis can generally already have the effect that resources are used sensibly. It helps ensure that a company does not miss opportunities. It also shows where capital can still be used in order to subsequently increase the company ‘s budget. This in turn can be used to finance new projects and promote certain products.

However, the SWOT analysis can also clarify whether or that a company is at risk from a certain point of view and may even have to file for bankruptcy in the foreseeable future . In this sense, it may also help to prevent an impending bankruptcy by showing which measures achieve ad hoc success or in which area the Achilles heel of a company exists.

On the one hand, figuratively speaking, the analysis functions as a Swiss Army Knife for management and management in threatening economic situations and, on the other hand, as an orientation to maintain a successful course or to optimize it and to achieve certain goals even more safely and quickly.

The goal of the swot analysis

When setting the goal of a SWOT analysis, the main focus is on creating an overview of the current situation. This means that it is a matter of determining the status of an institution, a company or the like in the market and in comparison to the competition. For example, a company can get useful information about itself and use it as orientation for actions.

The analysis can influence strategic management by asking which factors are relevant for success. The analysis is also used to create a general business plan, for example when founding a start-up . In addition, the SWOT factors are helpful guidelines for marketing and customer service .

This means that the actual objective of the SWOT analysis is to show meaningful options for action by considering internal and external aspects, which lead to sustainable success. She offers valuable support in the design of strategies to meet the constant change in the market, the increasing competition and, last but not least, the steadily growing demands of customers.

On the one hand, from an entrepreneurial point of view, the analysis highlights any competitive advantages compared to the competition as well as growth potential that can be directly tapped. In addition to such perspective approaches, it also enables decision-makers to react immediately to existing weaknesses or risks.

In addition, the SWOT analysis and its objectives should not be viewed exclusively with reference to entire companies and organizations. In fact, it is also used for individuals for individual development and reflection. In this sense, by looking at S, W, E and T, very personal talents and abilities can be recognized and various career opportunities can be considered or excluded.

Key figures of the SWOT analysis

The basic goal setting and the subsequent actual analysis are of course only parts of an overall process in order to achieve the set goals. Other sub-processes include the definition of measures and strategies, the associated budget planning and, last but not least, the development of useful key figures in order to be able to control any progress and successes at all.

These key figures, so-called Key Performance Indicators (KPI), can, for example, be mere figures with regard to costs, earnings and sales, which of course only cover superficial points. On the other hand, it makes more sense to go into as much detail as possible with the key figures and to link them as closely as possible with the analysis aspects and the measures taken. It is important to mention that the data collected can be leading indicators on the one hand and lagging indicators for results on the other.

A widespread and quite productive system of indicators would be, for example, one from four perspectives, whereby the first three are to be seen as leading indicators and the last is a late indicator:

• Customers: Acquisition of new customers and satisfaction of existing customers
• Organization: operating processes that are as fluid and flawless as possible (both in business and in production)
• Employees: satisfaction, commitment and constant motivation
• Finance: profit, profitability and liquidity of the company

Key figures therefore ultimately represent the necessary means of monitoring success. Their definition, in conjunction with the initially set objective of the analysis, ultimately indicates whether and how rich the analyzed data are and what benefits the strategies and measures derived from them actually provided. The key figures show which strengths were used sensibly, which weaknesses were encountered, how opportunities were used and how risks could be averted.

The individual points of the SWOT analysis

The usual way of creating a SWOT analysis begins with the two main parts, the company analysis as an internally-related part and the environmental analysis with external aspects. Both can be represented in a simple four-field matrix so that the individual points can be related to one another. From this connection, final deductions of suitable action strategies are possible.

Company analysis (internal)

As the name suggests, company analysis relates to the company itself. This is a self-observation to determine the internal factors, divided into strengths and weaknesses. These are to a certain extent the result of organizational processes, but also characteristics such as a good image. It should be noted that these are properties that we have produced ourselves. For example, a satisfied customer base of a green electricity producer may be a strength, but the generally good image of green electricity is definitely an (external) opportunity.

Environmental analysis (external)

Such external factors are in turn incorporated into the environmental analysis. This relates to the direct corporate environment, i.e. all external circumstances that are related to the company. The two characteristics to be analyzed here are opportunities and threats. It is important that these external conditions and / or changes are exogenously acting forces. This means that the company itself cannot influence this under any circumstances. Here it is important to keep an eye on those factors and to anticipate any changes. Once again, it is important to correctly differentiate between strengths and opportunities or weaknesses and risks. According to abbreviationfinder, SWOT stands for Strength, Weakness, Opportunity, and Thread.

Strengths

The internal strengths of a company, an institution and so on are those things that it is good at, so to speak. In particular, strengths are revealed when comparing with competitors, i.e. when looking at the competition. Examples of this are aspects such as a favorable location, good product quality, high qualification of the employees or whether the company works with low fixed costs . For the analysis of an individual, aspects such as a fundamental, ambitious optimism, creativity or certain professional qualifications should be mentioned here.

Weaknesses

The weaknesses are naturally the counterpart to the strengths. In this respect, they can also be filtered out particularly with a view to the competitive situation and the competition. Internal weaknesses, for example, an unfavorable location , deterioration in quality, too few employees or low financial strength are appropriate to the strengths . Certain dependencies may also be an individual weakness. For an individual, a lack of know-how, low resilience or low mobility must be listed accordingly.

Opportunities

The third point is to discuss the opportunities. The development in the respective market or in the environment is particularly important for a company, as it can be seen whether there is a change in customer behavior. In addition, trends can arise which influence the position of a company. New technological developments may also offer potential for profitable innovations, product improvements or the optimization of work processes. For example, this includes an expansion of the infrastructure, the broadband network (also for communication between employees) or positive demographic developments.

Threads (Risks)

Always important and a decisive point are ultimately the risks that arise from the outside. Such risks can ultimately have a negative impact on sales and, in the worst case, even lead to bankruptcy. It may be necessary to comply with legal changes or to enter into competition with new competitors who may even have settled in the immediate vicinity. In a sense, all opportunities in the opposite direction can pose a risk. This means that infrastructural or demographic developments also play a role here. Last but not least, one or the other risk can arise spontaneously, but all the more threatening – for example, the sudden lack of availability of a sales partner.

Combinations

After creating the aforementioned matrix with the SWOT factors just listed, the next step is to combine the individual points. The internal and external points are combined in detail. In other words, there are four connections in total: strengths with opportunities, strengths with risks, weaknesses with opportunities, and weaknesses with risks.

From these relationships to one another, suitable measures, actions and strategies can be developed that correspond as closely as possible to the objective of the analysis. To a certain extent, these actions can be summarized as expanding (strengths-opportunities), safeguarding (strengths-risks), catching up (weaknesses-opportunities) and avoiding (weaknesses-risks).

SO (Strengths & Opportunities)

The combination of strengths and opportunities is about determining which strengths of a company or similar can contribute to realizing opportunities. Which positive factors can be used here in order to benefit as much as possible from the opportunities that arise? In particular, expansion strategies are aimed at researching and realizing export and investment potential.

ST (Strengths & Threads)

The strengths and risks connection on the other hand ideally enables protection against emerging or general (economic, cultural, political etc.) threats. The strategies developed from this are accordingly aligned in such a way that they effectively use internal strengths to cushion, offset or even completely ward off environmental hazards, i.e. ultimately to counter these external circumstances for the benefit of the company.

WHERE (Weaknesses & Opportunities)

The combination of weaknesses and opportunities is less about the use or benefits of internal factors, but more logically about reducing those negative characteristics. In other words, in relation to favorable circumstances that arise, it is necessary to develop strategies and measures that reduce or eliminate the respective weaknesses as far as possible. When it comes to catching-up strategies, the consideration of whether weaknesses can even become strengths plays a central role.

WT (Weaknesses & Threads)

Ultimately, the most difficult and most drastic combination is that between existing, internal weaknesses and emerging, external risks. Above all, it is imperative to reduce weak points and negative factors in order not to let them develop into risks. Thus, more than any other, security strategies need to be developed selectively and applied accordingly. It is important to analyze exactly in which weak company aspects occurring risks would weigh particularly heavily.

Graphic

For the elaboration of all mentioned parts of the analysis and the representation of the SWOT factors, a graphic representation has always proven itself. As mentioned, the simplest and yet effective option for this is a corresponding matrix with four fields for the respective SWOT points. A continuation of this simple representation includes the strategies. This shows optimally how the internal and external aspects can be combined with one another and which strategy results from each one.

Areas of application of the SWOT analysis

In spite of all the ease of use, the question of practical application naturally arises. When is a SWOT analysis suitable? In fact, there are numerous areas in which such data collection and analysis makes sense.

First and foremost, there is a simple way of examining the location of an entire institution or individual products, processes or other objects. With the help of the SWOT analysis, it is possible to assess the competitiveness and assess the effectiveness, efficiency and profitability of business areas, product lines and so on.

In connection with this, the analysis process also functions as part of the evaluation of customer opinions and public perception, either in relation to individual objects or an entire company. The SWOT analysis is therefore particularly useful in marketing and should ideally be part of an overall concept. Finally, the advantage of a well-developed SWOT matrix is ​​that it can be used flexibly.

In addition, it provides a reliable method for developing a business plan, a basic business strategy or the (re) alignment of a company. In this respect, a SWOT analysis is also suitable for start-ups and self-employed entrepreneurs. Furthermore, the usefulness of such an analysis should be mentioned again when it comes to individual career planning.

How is a swot analysis created?

The preparatory work for the actual SWOT analysis first of all represents the basic objective. In fact, an effective analysis only succeeds if the respective data is related to a clearly defined goal. The mere increase in sales, for example, is a rather vague goal, while the increase in sales for a certain product allows more depth in the analysis as a target.

In order to then create a SWOT analysis, a whole team should work together at best. This ensures that all factors are perceived from different perspectives and thus determined as correctly as possible. It is useful to work with questions and to target the individual SWOT factors. For example:

• What can the company do better than a competitor / the competition? (Strengthen)
• Where does the company’s good image come from? (Strengths or opportunities)
• Which areas did you notice again and again due to problems? (Weaknesses)
• Why do other companies get the contract? (Weaknesses or risks)
• Which trends are affecting the company now or in the future? (Opportunities or risks)
• Which cultural / political developments are foreseeable? (Opportunities or risks)

Evaluation of the SWOT analysis

Following the complete analysis of all factors, the combination of the matching points takes place as an evaluation, as mentioned. This evaluation finally results in the strategies that support the objectives set in advance. Once those strategies have been implemented and implemented, there is finally a need for control. The corresponding key figures are then used, as already described.

EBIT is earnings before interest and taxes . This means that the operating result is presented independently of the amount of taxes and the forms of financing used, so that a company can evaluate itself in an international comparison.

Definition

“Earnings before interest and taxes” , or EBIT for short via abbreviationfinder, is also referred to as the operating result of a company. This is a key figure from business administration , with the help of which the profit that a company has achieved in a certain period of time can be read.

The amount of taxes and interest charged on loans vary in different countries. Therefore, after deducting these costs, the result of the respective company is no longer suitable for an international comparison. The operating result, however, is not influenced by such factors. It is therefore useful for evaluating a company, for example.

EBIT calculation

EBIT is calculated using either the total or cost of sales method. Both methods serve the profit and loss account of a company and offer the possibility of determining the EBIT as a subtotal.

In the total cost  method, you compare the sales in a period with the total expenses incurred in the same period. In the cost of sales method , however, the sales of a period are compared with the direct production costs for these sales.

When comparing the EBIT of two or more companies, it is not just a matter of looking at the key figure itself. In addition, you should make sure that it was determined using the same method in all cases. Roughly speaking, the total cost method is a variant that is more commonly used in the German-speaking area. The cost of sales method, on the other hand, is more likely to be used in the Anglo-Saxon region and for companies that are listed on the stock exchange or are internationally active.

A simple formula for calculating EBIT:

Net income
+ tax expense
– tax income
+ interest expense or other financial expenses
– interest income or other financial income Earnings
= EBIT

What does the EBIT figure say?

EBIT is a key figure for the operating result . All expenses that you cannot assign to the actual activity of the company are filtered out for the calculation. Extraordinary expenses and income are also not taken into account.

Interest and taxes are ignored in the calculation, as they do not relate directly to the result of the operating business. This is how the company’s operating result is presented.

EBIT margin

You don’t take interest and taxes into account when calculating EBIT. Therefore, it is also possible to compare companies from several countries in this way. The results from the balance sheet are often falsified by various tax or interest rates, but this is not a problem with EBIT.

The so-called EBIT margin , which you can calculate as follows:

100 * EBIT / sales = EBIT margin in percent

It indicates how high the operating result was in relation to the company’s annual turnover . In short, a higher value means that a company is operating particularly economically. However, you should note that the value can differ significantly from industry to industry. Comparisons across different industries should therefore not be based on this margin.

The general rule of thumb is that a company with a margin of less than three percent is considered not very profitable or even vulnerable to crises. On the other hand, there is high profitability if the value is more than 15 percent.

The ROI is a business key figure for the return of a company. It is measured by the percentage ratio of capital employed and profit achieved and can be used to assess an investment, the performance of a branch of business or the entire company.

Short for ROI by abbreviationfinder, return on investment is a key figure calculated from the return on sales and capital turnover, from which the relationship between the capital invested and the profit achieved results. It can also be viewed as the profit target of a company or an individual business area, since it expresses the amount of the expected return flow of capital from an investment.

The ROI thus serves as a benchmark for the performance of companies or certain areas of the company in a certain period of time. Its development goes back to the American engineer Donaldson Brown, who defined it in 1919 while working for the chemical company Du Pont de Nemours. It is considered the key figure of the so-called Du Pont scheme. This oldest and most well-known key figure system, with which balance sheet analyzes can be created from several such figures and entrepreneurial decisions can be controlled, was also developed by the eponymous group. In the Du Pont scheme, the ROI is defined as the multiplication of return on sales and capital turnover.

The calculation of the ROI makes sense if it can be assumed that an investment will pay for itself within its expected useful life. In the IT sector, this useful life is set very low at around three years; it can be significantly longer for buildings and production facilities.

Calculate return on investment – ROI formula

To calculate the ROI, the total capital of a company, which is made up of equity and debt , is always used . However, according to a modernized variant of the ROI, individual investments can also be calculated. The prerequisite for this is that the returns from the individual investment are already known.

The ROI formula explains: This is behind the key figures for the calculation

Return on sales

The return on sales (also: Return of Sales (ROS) or net return on sales) is understood to be the relationship between profit and sales within an accounting period. It can be used to read what the percentage profit of a company is in relation to a certain turnover. For example, if the return on sales is 10%, this means that ten cents of profit were made for every euro wagered. If the return on sales increases, this is an indication of increased productivity, a falling ROS, on the other hand, means less productivity and thus increasing costs. The ROS can be calculated using the formula:

Return on sales = (profit / net sales) x 100

Capital turnover:

The capital turnover indicates the ratio of equity or total capital employed to sales. The reference values ​​for calculating the capital turnover are the average total capital and the sales revenue within a business period. By determining the capital turnover, it is possible to determine how much turnover was achieved with a certain amount of capital in a certain period. The formula for calculating the capital turnover is:

Capital turnover = net sales / total capital (or invested capital)

An example of calculating the ROI

A company is investing 50,000 euros in advertising in order to acquire new customers. For this measure, the company achieved a turnover of 60,000 euros.

The capital employed is therefore 50,000 euros, the generated sales 60,000 euros and the profit thus 10,000 euros (sales – costs = profit). Now just insert into the formula:

Return on Investment (ROI)

= Return on sales x capital turnover

= (Profit / sales) x (sales / invested capital)

= (10,000 / 60,000 x 100) x (60,000 / 50,000)

Return on Investment (ROI) = 2 = 20%

The calculated return on investment is therefore 2 or 20%, which means that with every euro invested, a profit of € 0.20 (and € 1.20 sales) was generated.

Analysis and interpretation of the ROI

For a correct analysis of the ROI, it is important to note that only monetary and internal company factors are recorded by it. Influences that have to do with the market situation, image values, customer satisfaction, risks and competitors as well as time factors are not included. For this reason, the return on investment should never be used as the only analysis tool for evaluating company performance.

As can be seen from the formula, the ROI is characterized by two important company-specific key figures and can therefore:

• have the same result in different combinations,
• be increased if the return on sales (profit: sales) decreases but the capital turnover (sales: capital) increases,
• The independent analysis of return on sales and capital turnover are carefully examined for changes and their causes.

The results of the ROI calculation in percent can be compared with profit targets: A return on investment of 7.5 means that a certain amount of capital has brought in a return of 7.5%. Such a value can be quite satisfactory for traditional companies, whereas growth sectors will aim for values ​​between 15 and 25%.

What are the advantages of calculating the return on investment?

Even if the informative value of the ROI is limited by the mentioned limiting factors, there are some undeniable advantages. The ROI provides important data for:

• the analysis and comparison of individual company areas and investment objects,
• the determination and consideration of the overall performance of a company for a past period,
• the planning and control of future investments

The importance of ROI in marketing

In marketing, the return on investment is particularly important in order to be able to plan in advance and finally evaluate the efficiency of an advertising campaign from a financial point of view. For this purpose, two units of measurement are used that are directly related to the ROI.

ROMI (Return on Marketing Investment, also: RoMI):

The ROMI measures – just like the ROI – the relationship between capital employed and profit achieved. However, it only relates to the marketing sub-area. For the calculation, the entire effort for a marketing measure, such as product costs, marketplace costs and pricing, is included. The formula for calculating the ROMI is:

ROMI = (net sales – product costs – advertising costs) / advertising costs

ROAS (Return on Advertising Spend):

The ROAS represents the profitability of an advertising measure. Among other things, it is used to implement measures that increase the quality of the measure and / or reduce the costs if the results of a campaign are negative.
The ROAS is calculated using the formula:

ROAS = (net profit / advertising costs) x 100