Return on capital measures a ‘rate of return’. The main reason leading someone to an investment is making of profit. We however need to understand the meaning of the word “investment” to understand this term. Investment is the laying down of capital sum in a business venture in order to secure a regular flow or as Greer and Farsell (1984) put it, “the sacrifice of something now for the prospect of later benefits.” The definition goes in line with one of the qualities/requisites of a good investment that of security and regularity of income. The income flow is what is referred to as return on capital otherwise known as remunerative rate or interest rate.
Return on capital could also be defined as that income which an investor is seeking to acquire, and which will push him/her to venture in a business or attract his investment capital outlay so as to bankroll production (Ifediora 1993). The economists viewed it as the interest which the capital should attract or generate (Anyaele, 1990). According to Ifediora (1993), return on capital invested must be attractive enough to attract funds and other resources to the particular kind of investment. Interest rate or return on capital is a market phenomenon and varies in amount with both the supply and demand of money and the quality characteristics of the investment property. However, it is always necessary to anticipate the quantity and quality of the return (Ajayi, 1998).
As generally and naturally intrinsic phenomenon, return, either in the form of capital growth, high income or a combination of both is the essential characteristic of any investment. A full understanding of the overall return, taking both capital change and income yield into account is a prerequisite if informed investment decisions are to be made and opportunities compared analytically. This goes to establish the fact that there are many investments such as:
- Articles bought for use
- Stocks and shares
- National saving certificates, e.g. treasury bills, treasury certificates, etc.
- Gilt-edge security
- Fixed deposit account
- Debenture
- Unit trust and investment trust (property bonds and shares)
- Index-linked gilts
- Property, etc.
However, an investor will always go for the investment with the highest profitability margin as well as considering the security of his capital for a continuous and regular flow of income.
References
Ajayi, C.A. (1980). Property investment valuation and analysis. Ibadan: De-Ayo Publications.
Anyaele, J.U. (1990). Comprehensive economics. Lagos: .A. Johnson (Publishing) Enterprises.
Ifediora, G.S.A. (1993). Appraisal framework. Enugu, Nigeria: Iwuba Ifediora & Associates.
Return of capital. (n.d.). Wikipedia. Retrieved June 01, 2017, from Answers.com Web site: http://www.answers.com/topic/return-of-capital-1
