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All about Return on Investment and ROI formula

[ecis2016.org] Know all about ROI and how to use the ROI calculator to assess the returns received

ROI – Return on Investment is an important term that shows all the returns you receive from your investments. ROI is hugely beneficial in providing insight into various investments and zeroing in on what is profitable.

The evaluation of investments and ROI depends upon factors like financial goals and risk tolerance levels. Additionally, ROI would help you understand the cost of the investment and find out any sort of hidden charges which could affect your exact return on the investment. ROI is calculated using a unique formula and is denoted in a percentage. ROI is basically a ratio which compares your investment costs to the returns received on them.

ROI is an excellent way to gauge profit margins and find the highest returns available in the present market. An ROI value can have a positive or negative factor. The negative factor signifies that the investment may result in a loss of money, and the returns won’t meet or exceed the cost of investment. A positive factor shows that these investments will be profitable in the long run. People should avoid negative ROIs to save money and make good financial decisions.

ROI: How to calculate?

ROI can be calculated using the ROIformula: 

ROI= Net Income/Cost of Investment *100

An easier method to use the ROIformula and calculate ROI is to use an ROI calculator.

ROI Calculator: How does it work?

The ROI calculator is an easy way to calculate the ratio of the costs of your investments to the returns received. The ROI calculator can help you know about the investment returns across various periods. The ROI Calculator uses a single ROIformula developed by experts. 

To find the ROI percentage, you have to enter details of your initial invested amount, your returns on that investment and the period of investment. The ROI Calculator will then display the total profits received on the mentioned investment. Additionally, it also finds out the absolute return, annualised return and the CAGR and annual growth rate.

How to find ROI using ROI calculators?

The simple ROI formula to find out the ROI value is to use the formula ROI = Net Profit / Cost of the investment * 100. Remember that the absolute return on investment and the annualised return on investment are two separate things. 

Absolute returns use a ROIformula for calculation. The absolute return value will tell you the reports of the stock market within one year. To find the absolute return on your investment, you need to make use of the following ROIformula:-

The final value of the investment – Initial value of the investment)/ Initial value of the investment. Then you need to multiply it by 100 to find the percentage.

Say the initial investment of a venture is Rs 45,000 which has grown to Rs 50,000. You may calculate the absolute return as: 

50,000 – 45,000 / 45,000*100 = 20%

The annualised return on investment is used to show the returns and performance of the investment beyond a year and in different periods. Annualised return uses a different calculation formula. This ROIformula is a bit more complicated. Here is the ROIformula used to calculate annualised returns: 

End Value – Beginning Value/Beginning Value * 100 * (1/holding period of the investment) 

Let’s consider the cost price of a house to be Rs 40 lakh in January 2010 and the selling price to be Rs 60 lakh in January 2015. Let the initial value of the investment be Rs 40 lakh and the final value of the investment Rs 60 lakh. The holding period of the investment is five years. 

Annualised Return = 60,00,000 – 40,00,000 / 40,00,000 * 100 * (1/5) Annualised Return = 13.33%. 

There is also a way to annualise the absolute return by multiplying by the factor:

365 / holding period in days investment was held.

12 / holding period in months.

1 / holding period in years.

What is a good ROI?

ROI’s depend on the risk-appetite and time needed for an investment to offer a return. Investors with a lower risk-appetite will accept lower ROIs as compared to investors with a higher risk-appetite.

Source: https://ecis2016.org/.
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Debora Berti

Università degli Studi di Firenze, IT

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