When examining an entire organization rather than a well-defined project, most analysts focus on return on equity rather than return on investment. Equity is an organization’s total assets minus outside claims on those assets. Equity also can be defined as the initial investments of stakeholders (donors or investors) plus the organization’s retained earnings.
What is an adequate return on investment? The answer to this ques- tion depends primarily on three factors: what low-risk investments (e.g., short-term US Treasury securities) are yielding, the riskiness of the enter- prise, and the objectives of the organization.
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All business investments entail some risk. Those risks may be high, as they are for a pharmaceutical company considering allocating research and development funds to a new drug, or they may be low, as they are for a primary care physician purchasing an established practice in a small town. In any case, a profit-seeking investor will be reluctant to commit funds to a project return on equity Profits divided by shareholder equity.