A Simple Guide to Calculating Return on Investment (ROI)

This is an article on a guide to calculating Return on Investment (ROI), which will help you better understand what Return on Investment is, and how you can calculate it.A Simple Guide to Calculating Return on Investment (ROI)

What is Return on Investment?

Return on Investment (ROI) is a metric that measures the gain or the loss made on an investment relative to the amount invested, which is calculated with the aid of simple formula (i.e.) net income which is divided by the original capital cost of investment. This is a ratio that compares the gain or loss from an investment relative to its cost and is very useful in evaluating the potential return from a stand-alone investment, as it is in comparing returns from several investments.

Methods of Calculating Return on Investment (ROI)

There are four methods of calculating return on investment calculation. Here there are:

Net Income Method

ROI formula = ( Net Income /Investment Value) * 100

Capital Gain Method

ROI Formula = (Current Share Price – Original Share Price) * 100 / Original Share Price.

Return on Investment

Return on Investment (ROI) Definition – Investopedia

https://www.investopedia.com › … › Financial Ratios

Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of several investments.

ROI Formula (Return on Investment) – Corporate Finance …

https://corporatefinanceinstitute.com › Resources

Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost.

What Is ROI? How to Calculate Return on Investment

https://searchcio.techtarget.com › definition › ROI

There are multiple methods for calculating ROI. The most common is net income divided by the total cost of the investment, or ROI = Net income / Cost of

A Complete Guide on How To Calculate ROI | Indeed.com

https://www.indeed.com › … › Career Development

How To Calculate Return on Investment (ROI) With Formula and Examples · Net Return on Investment: ($360,000 – $300,000) – $18,000 – $10,800 – $15,000 = $16,200.

Total Return Method

ROI Formula = (Current Share Price + Total Dividends Received – Original Share Price) * 100 /Original Share Price.

Annualized ROI Method

ROI Formula = [(Ending value / Beginning value) ^ (1/no. of years)] – 1

Benefits of Return on Investment

The following are the benefits that you enjoy on Return on Investment:

  • Return on investment is easy to calculate and can be calculated by two figures which are benefit and cost.
  • The ratio of Return on Investment is universally understood and is very popular and commonly used.

Demerits of Returns on Investments

  • Firstly, ROI is susceptible to manipulation. This is because the calculation differs based on investors, while some consider one aspect, others ignore it, thus it can be easily manipulated.
  • Secondly, returns on Investments disregards the factor of time. The investor is expected to compare two instruments under the same time period and same circumstances.
  • ROI only emphasizes financial gains when considering the returns on investment, this means that it does not consider ancillary benefits, like social or environmental goods.
  • Returns on Investments figures can be exaggerated if all the expected costs are not included in the calculation.

How to Calculate Returns on Investments (ROI)

Returns on Investments can be calculated using two different methods:

The first method is:

ROI = Net Returns on Investments / Cost of Investment × 100

The second method is:

ROI = Final Value of Investment – Initial Value / Cost of Investment × 100.

Interpreting the Returns on Investments (ROI)

In calculating ROI, have the following in mind:

First ROI is typically expressed as a percentage. Because it is intuitively easier to understand (than when it expressed in the ratio).

Second, the ROI calculation includes the net return in the numerator. This is because returns from an. Investment can either be positive or negative.

In a situation where ROI calculations yield a positive figure, it implies that the net returns are in the black (because total returns exceed total costs).

On the other hand, when. ROI calculations yield a negative figure, it implies that the net returns are in red because total. Costs exceed total returns. Simply put, the investment produces a loss). Lastly, in order to calculate ROI with the highest degree of accuracy, total returns and total costs should be considered.

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