A:

Social return on investment (SROI) is a method for measuring values that are not traditionally reflected in financial statements, including social, economic and environmental factors, which can identify how effectively an organization uses its capital and other resources to create value for the community. While a traditional cost-benefit analysis is used to compare different investments or projects, SROI is used more to evaluate the general progress of certain developments, showing both the financial and social impact of the corporation.

SROI is useful to corporations because it can improve program management through better planning and evaluation; increase the corporation’s understanding of their impacts; and allow better communication regarding the value of the corporation’s work (both internally and to external stakeholders). Philanthropists, venture capitalists, foundations and other non-profits may use SROI to monetize the social impact, in financial terms.

A general formula used to calculate SROI is as follows:

SROI = (social impact value – initial investment amount) / initial investment amount *100%

Assigning a dollar value to the social impact can present problems, and various methodologies have been developed to help quantify impact. The Analytical Hierarchy Process (AHP), for example, is one method that converts and organizes qualitative information into quantitative values.

While the approach varies depending on the program that is being evaluated, there are four main elements that are needed to measure SROI:

  • Inputs – resources investment in your activity (such as the costs of running a job readiness program)
  • Outputs – the direct and tangible products from the activity (for example, the number of people trained)
  • Outcomes – the changes to people resulting from the activity (i.e., new jobs, better income, improved quality of life for the individuals; increased taxes and reduced support for the government)
  • Impact – the outcome less an estimate of what would have happened anyways (for example, if 20 people got new jobs but 5 of them would have anyways, the impact is based on the 15 people who got jobs as a result of the job readiness program)
RELATED FAQS
  1. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  2. How can the price-to-earnings (P/E) ratio mislead investors?

    The price-to-earnings (P/E) ratio is calculated by dividing a company’s stock price per share by its earnings per share (EPS), ... Read Full Answer >>
  3. How can return on investment (ROI) calculations be manipulated?

    Return on Investment (ROI) is a performance metric used to evaluate the financial efficiency of an investment, or to compare ... Read Full Answer >>
  4. Is there value in comparing companies from different sectors by using the debt-to-equity ...

    The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing ... Read Full Answer >>
  5. What is considered a high debt-to-equity ratio and what does it say about the company?

    The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing ... Read Full Answer >>
  6. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
Related Articles
  1. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  2. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  3. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  6. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  7. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  8. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  9. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  10. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
RELATED TERMS
  1. Interest Coverage Ratio

    A debt ratio and profitability ratio used to determine how easily ...
  2. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  3. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  4. Equity

    The value of an asset less the value of all liabilities on that ...
  5. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!