If your business gives you a ROI of 85% and you took a loan to start this business (with an interest rate of 25%), does this mean your high ROI can cover your interest rate easily? So you'd still have 85-25= 60% left in returns after covering the loan interest?
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Depends on your leverage ratio.
Assuming that by RoI you mean RoE.
If you have $20 of equity, and $80 of debt. Your RoI is $17 (85% of $20) and your interest payment is $20 (25% of $80). So you are actually in a loss making situation.
If by RoI you mean RoA - then you are better off. Although realistically 85% RoA and 25% interest are quite extreme numbers.
Hi there,
In theory yes, however:
- The interest rate you pay is pre-defined
- The ROI is normally expected
So there is always the risk that the ROI won’t fully materialize.
Best,
Francesco
Hi there,
Yes, you've essentially exceeded your cost of capital here by a very healthy margin.
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