Financial Glossary
Book Rate of Return (Accounting Rate of Return)
The book rate of return, also known as the accounting rate of return, measures the average annual accounting profit an investment generates relative to its cost or average book value. It is calculated by dividing the average annual net income produced by an investment by the average or initial book value of that investment, expressed as a percentage. Because it relies on accounting profit rather than cash flows, it ignores the time value of money.
Problem & Application
Operators evaluating a capital purchase, such as adding cabins at a campground or renovating a rental unit, can use the book rate of return as a quick screen for whether the project clears their target return. It is easy to compute from existing financial statements, which makes it useful for a first-pass comparison of several projects. Its limitation is that it does not account for the timing of returns, so it is best paired with a cash-flow-based measure before committing real money.
In Short
The book rate of return is a simple, statement-based gauge of profitability that helps owners rank potential investments quickly. Treat it as a starting filter, not the final word on a capital decision.