Accounting Rate of Return (ARR)
Definition
A financial ratio that measures how much profit a business generates relative to the capital invested, expressed as a percentage.
Example
Example 1:
A Lagos real estate company invests ₦500 million in a housing project and generates ₦75 million annual profit before tax, their ARR of 15% helps management decide whether the investment is performing well enough compared to other opportunities.
Example 2:
A retail chain in New York evaluates a proposed store expansion by calculating its ARR, dividing the projected annual profit by the capital required before deciding.