ROI calculator is a kind of investment calculator that enables you to estimate the profit or loss on your investment. Our return on investment calculator can also be used to compare the efficiency of a few investments. Thus, you will find the ROI formula helpful when you are going to make a financial decision. If you know how to calculate ROI, it's easier to foresee the results of an investment. Show
In the following part of the article you will find answers for the following questions:
And last but not least, in the text below, you will find out how to use our return on investment calculator to make your calculations (and thus financial decisions) even faster and smarter. What is ROI?First of all, you need to know that ROI is an abbreviation of Return of Investment. By definition, ROI is a ratio between the net gain and the net cost of an investment. In other words, ROI compares the net income from an investment to the net expenses required to finance that investment. Customarily ROI is presented in the form of percentage points. Thus, when a calculation returns a result of Alongside other simple measures of profitability (NPV, IRR, payback period), ROI is one of the most frequently used methods of evaluating the economic consequences of an investment. Undoubtedly, its main advantage is its simplicity – ROI can be easily applied to measure investment profitability, as it is based on easily available data and its value is clear to understand and interpret. Moreover, as ROI is calculated as a percentage, it's easy to compare the results of many different investments. Consequently, you are able to choose the most beneficial one, all thanks to ROI. Before we move on and discuss ROI in greater detail, it is worth to mention that in finance, several different measures may be called return on investment. For example, you can say ROI when referring to Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity or Earnings per Share. However, the best known and probably the most commonly used is a measure known as simple return of investment, henceforth referred to as return of investment (ROI). By the way, it is worth to mention that due to the terminology confusion, when you use ROI measure in the real-life decisions, it is a good idea to know precisely how it has been computed. We also believe that this is one more reason to read our article carefully from top to bottom. ROI formulaInvestors can't estimate the efficiency of their investments without understanding how to calculate ROI. That's why the ROI formula plays a crucial role in investment decisions. The ROI formula is based on two pieces of information - the gain from investment and the cost of investment. The equation that allows calculating ROI is as follows:
Where:
Note here that the ROI equation doesn't take into consideration any risks associated with the investment. It is one of the biggest limitations of ROI (for more, see the section advantages and disadvantages of ROI). Examples of ROI calculationDo you want to understand the ROI equation? Are you curious about how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of an ROI calculation? We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics. Example 1 As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000. To calculate return on investment, you should use the ROI formula:
So the return on your investment for the property is 50%. Example 2 As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years. So: Then you can use the ROI formula:
The ROI of the marketing program is 60%. Example 3 You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. Total value of the transaction was then: The ROI of this investment is:
A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, lets see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:
This time, the outcome of your investment is far from profitable. Return on investment calculatorThe numbers given in the examples in the previous paragraph are rather simple, the number used in real business investments tend to be a bit more complicated. If we deal with much larger amounts of money or with more complex numbers, it's far more comfortable to use our return on investment calculator. Although the ROI calculator bases its calculation on the same formula, the usage of it is much faster and easier. With our tool, it's enough only to type the invested amount and the returned amount to get your estimated ROI. Return on investment calculator is a tool for everyone who has got a business or is planning to set one up. This is also highly recommended for any investors, from shopkeepers to stockbrokers. Are you curious how to use our return on investment calculator? Obtaining the value of ROI with our smart return on investment calculator is easier than you thought. To assess the profitability of your investment within a few seconds, you don't need to memorize the ROI formula or perform any computations, all you need to do is to fill the appropriate fields in our calculator:
That's it! In an instant, our return on investment calculator makes all necessary computations and gives the results. They are shown in a field ROI where you could see the value of ROI as a percentage. In conclusion, our ROI calculator can help you make the most beneficial financial decision for you, completing many different cost-benefit analysis's in no time. Moreover, with the mobile version of our return on investment calculator you are able to compute ROI whenever and wherever you want. ROI and financial decisionsReturn on investment is a useful measure to estimate the surplus of net investment benefit on an accrual basis. ROI can also be used in making rational financial decisions. As a simple method, ROI is used primarily as an auxiliary at the initial stage of assessment of the investment project. In general, the decision criterion is defined in the following way:
Where LV is a predefined limit value. In the simplest case (investor has a capital to invest and has only one investment alternative), the decision criterion is formulated as follows:
In real life investments, a limit value for ROI analysis may be set on a particular level which is different than zero. For example, you can set a return on investment in your branch of industry (ROIb) as a limit value. Then the absolute decision criterion is:
In a professional application, financial analysts and decision-makers usually use weighted average cost of capital (WACC) as a limit value. In this case, the decision criterion is:
ROE vs. ROIAs return on investment (ROI) is sometimes confused with return on equity (ROE), it is worth briefly discussing the similarities and differences between them. Firstly, both ROI and ROE are simple methods of an absolute evaluation of investment profitability. The characteristic feature of ROI and ROE is that they are single-periods methods, and they do not have the same value for the entire duration of the investment. Moreover, both of these indicators do not include any risk measure. In addition, neither ROI nor ROE takes TVM (which you can read more about in our time value of money calculator) into account. The main difference between ROI and ROE is that the former takes into account the total expenditure on investments (this is own capital and debt), whereas the formula of the latter includes only own capital. Advantages and disadvantages of ROIThe main advantages of ROI are as follows:
On the other hand, the most notable limitations of ROI are:
Investing recommendations for better ROI
Additional information and further calculatorsReturn on investment is a very popular measure because of its simplicity and usefulness. Now that you know how to calculate ROI, it's high time you found other applications which will help you make the right choices when investing your money. We are sure that the ROI equation is not the only thing you should be familiar with to make smart financial decisions.
FAQHow to calculate the ROI percentage?To calculate the ROI percentage, follow the given instructions:
How to calculate the ROI on real estate investment?To calculate the ROI on a real estate investment, proceed as follows:
If the net gain on an investment is $1200 and the investment cost is $2000, what is the ROI?0.6 or 60%. The formula for calculating ROI is What does 30% ROI mean?An ROI (return on investment) of 30% means that the profit or gain from an investment is 30%. For example, if the investment cost is $100, the return from investment is $130 - a profit of $30. Is ROI calculated monthly or annually?Takeaways – How to Calculate & Interpret ROI
ROI can be computed and annualized if not measured over a one-year time frame. Annualization is possible for short-term investments held under one year or multiple-year investment periods.
How do you calculate ROI over a period?Key Takeaways
ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
What is a good monthly ROI percentage?For stock market investments, anywhere from 7%-10% is usually considered a good ROI, and many investors use the S&P to guide their investment strategy. There are other types of investments you can make and those have different expectations, such as: Government bonds can produce a return of around 5%.
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