What is the return on investment?
Return on investment or ROI is profitability ratio used to calculate the profits an investor will receive based on the investment cost. It is mostly measured as profit divided by the cost of investments. The result of return on investment is expressed as a ratio or the percentage. The return on investment formula:
ROI= (gain from the investment – total cost of investment) / cost of investment
The gain from the investment is referred to the profits gained from the sale of the investment of interest. The investment can be easily compared from one to one another as it is measured as the percentage. The formula can be applied to any type of investments like stocks, real estates etc. and also anything that has a cost and can derive the gains from it.
Uses of ROI:
- It is the simplest way of measuring the percentage of profit on the investment.
- It will help to distinguish between different investment opportunities.
- It will be helpful to calculate or compare the profits of the past as well. As the ROI will be changing from time to time so by calculating the past profit it will be helpful to the investor.
- It will be helpful to take the right investment decisions. As it helps to compare between high performing and low performing investments.
Benefits of ROI:
- It will be helpful to quickly check the perspective of investment.
- It measures the potential returns on different investment opportunities.
- It assists in measuring the investment in particular departments.
- It helps in estimating the competition around the market.
- It will be very helpful in taking the right investment decision. It is simple but effective.
- It is one of the simplest calculations in financial ratios.
- It is one of the most accepted concepts of finance and investment.
Limitations of ROI:
- The time factor is ignored in the ROI. It is the major drawback of ROI.
- Different ways of calculating the ROI creates confusion. As investors use different formula and company uses the different formula. It creates more options and investor may get confused about it.
ROI is calculated in different ways and investment time is included it creates a hurdle. To make this clear while comparing two different calculations figured out with the calculator then the annualized ROI is used to identify the ROI amount.
The components included in the ROI calculator:
- Amount invested: The amount of investment by the investor.
- Amount returned: The amount gained by the investor on the investment.
- Investment time: The time period of investment.
Using this calculator we can calculate the investment gained, ROI and also Annualized ROI. It will be helpful for the investor to compare between different investments methods.