Introduction to return on investment (ROI)
Return on Invest (ROI) is a ratio calculated to determine how much profit is being made on a particular investment over a period of time. It is the ratio between net income and the investment costs. It measures the performance and the efficacy of an investment, thereby signifying the profitability in relation to the investment cost.
Understanding Return on Investment
Return on Investment is calculated using the following formula: ROI = (Current Value of Investment ā Cost of Investment) / Cost of Investment * 100 ROI = (Net Profit / Cost of Investment) x 100
The cost of investment minus the present value will give the net profit acquired from the investment. When dividing it by the original cost of the investment, and dividing it with 100 gives us the percentage value of the return made on that investment.
ROI is a simple instrument to calculate and use for comparisons. It is versatile and can be applied individually across many varieties of investments like ROI on purchasing a new stock, expanding of factory or in any trade. Using ROI, a company can determine whether the investment is bringing in sufficient returns as expected at the time of investing. ROI is expressed in percentage, which makes the figure more compatible to compare across a vast variety of investment profiles.
ā## Factors to Consider
ROI is versatile across any kind of investment, therefore it can be used by anybody, any company, any individual or domestic investor of all kinds, to determine the efficacy of their investment.
ROI is only a show of the efficacy, a study of the result after a period of time. It cannot be used as a measure to predict risk or eliminate it.
The higher the ROI, the better, is the common wisdom among investors. However, factors like the amount of time taken to acquire the predicted profits, the amount put into it as the capital etc. matter while deciding healthy ROI.
ROI is not sensitive to time. When there are two investments for a period of two years, both of which show differing values in the duration, ROI is not the value that will decide which of them was a better investment. This is because ROI does not take into account compounding returns.
