Return on Investment (ROI)

Return on Investment (ROI)

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What Is Return on Investment (ROI)?


Return on investment (ROI) is a performance metric used to assess an investment's effectiveness or profitability. ROI measures the amount of return on an investment in relation to the cost of the investment. The advantage accrued increases as the ratio rises.


KEEPER FORMULA

  • An investment's performance is assessed using the widely used profitability statistic known as return on investment (ROI).
  • By dividing an investment's net profit (or loss) by its initial cost or outlay, ROI is expressed as a percentage.


How to Calculate Return on Investment (ROI)

Return on investment (ROI) formula is as follows:

First Method


Example: James invested $1,000 in www.primeshops.co website Buy and Sell Company in 2021 and sold the shares for a total of $1,200 one year later. To calculate the return on this investment, divide the net profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%.

Second Method


Example of the ROI Formula for Property Calculation

An investor purchases property A, which is valued at $500,000. Two years later, the investor sells the property for $1,000,000.

We use the investment gain formula in this case.

ROI = (1,000,000 – 300,000) / (700,000) = 233% profit


Other ROI Formula

There are several versions of the ROI formula. The two most commonly used are shown below:

ROI = Net Income / Cost of Investment

Or

ROI = Investment Gain / Investment Base

Or

ROI = Capital Gains % Commission % + Dividend Yield​It is most commonly measured as net income divided by the original capital cost of the investment.

ROI Formula for Stock Calculation

ROI Formula 

= [(Ending Value / Beginning Value) ^ (1 / # of Years)] – 1

Where:

# of years = (Ending date – Starting Date) /  365

Example: An investor buys a stock on January 1st, 2020 for $12.50 and sells it on August24, 2020, for $15.20.

What is the regular and annualized return on investment?

Regular = ($15.20 – $12.50) / $12.50 = 21.6%

Annualized = [($15.20 / $12.50) ^ (1 / ((Aug 24 – Jan 1)/365) )] -1 = 35.5%


What Makes a Strong ROI?


A good ROI will depend on variables including the investor's risk tolerance and the length of time it takes for an investment to start paying off. Investments that can take longer to pay off typically need a higher return on investment (ROI) to be appealing to investors.


When analyzing the returns on an investment, ROI exclusively highlights monetary advantages.

Limitations of the ROI Formula

1. The Time Factor Is Ignored by the ROI Formula: A greater ROI score does not always equate to a better investment choice.

2 The ROI Formula is Subject to Manipulation: Depending on the ROI formula applied, a ROI estimate will vary between two people.

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