Calculate Return on Investment

Making Sense of ROI 

ROI is an acronym that stands for return on investment. It is the benefit that an investor gets from an investment he has made in a business or the market. Thus higher the ROI, the higher is the benefit from an investment. It is a good tool to measure the performance of a business or an investment.  It is also a very good measure of efficacy of various investment tools. Speaking in monetary terms, ROI is a way of evaluating profits in terms of investment.

ROI is a very good measure as it indicates whether one should invest in a particular economic entity or not. It is also used by businesses to make a comparison of their various business strategies. After comparing ROI of different strategies, businesses can decide whether to continue with some of them or not. For an investor, ROI is a tool to find out the expected rate or return on his investment.

Decisions of businesses are heavily dependent upon ROI. These decisions are pertaining to use of assets and also pumping in of money. In a survey involving 200 marketing executives, it was found that decisions of 77% of these managers were based upon expected ROI.

ROI is not always in monetary terms. There is another ROI called social return on investment that is used by big businesses to find out returns on their social and environmental expenditure. ROI can be used as a tool to assess its impact on stakeholders and also to find out alternate means of improving the performance.

ROI is quite easy to grasp when it is used to make decisions. The formula to arrive at ROI is flexible to allow the user to change the variables. One can always change the length of time as well as variables that are used to calculate costs and profits. However, it is always risky to base ones decisions on choosing investment projects as one doesn’t really know much except than the figure that comes out of the formula. When one is investing money for a long time period, higher adjustment in Net Present Value needs to be made. One should take into account discounted ROI instead of regular UOI much like the concept of discounted cash flow.

how to calculate return on investment?

If one is finding ROI in a given time period, the formula is quite simple.

ROI = (Profit /investment) X 100

Profit = gross profit – expenses