Formula to Calculate Return on Investment
Return on investment measures the gain or loss made on an investment relative to the amount invested and is calculated using a simple formula i.e net income divided by the original capital cost of investment. ROI calculation is done to analyze the performance of investment
It is represented as follows –
This formula is flexible and used by the different investor to compare ROI on different potential investments and return on stocks.
Calculation Examples of Return on Investment
Let’s see some simple to advanced example to understand the concept better.
Example #1
An investor buys $10,000 of stocks and sells the shares 1 year later with amount $12,000. The net profit from an investment is $2,000 and ROI is as follows:-
- Return on Investment
So from the above calculation of Return on Investment will be:
This is actual profit including taxes and fees.
“Gain from investment” refer to sales of investment interest. Return on investment is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investment against one another.
Hence, return on investment is a difference of gain from investment and cost of investment upon the total cost of investment
Example #2
An investor invested $15,000 and sell same after a few years and he sells same at $20,000. Then, ROI will be as follows
- Return On Investment
So from the above calculation of Return on Investment will be:
Example #3
Suppose an investor invests $1000 in the bakery in 2015 and sold his stock in 2016 at $1200. Then, ROI Formula will be as follows:-
ROI Bakery = (1200-1000) * 100 / 1000 = 20%
He also invested $2000 in the shoe business in 2015 and sold his stock in 2016 at $2800 then ROI Formula will be as follows:-
ROI Shoes_Business = (2800-2000) * 100 / 2000 = 40%
So, through ROI one can calculate the best investment option available. We can see that investor book more profit in the business of Shoes as the return on investment is shoe business is higher than the bakery business.
Top 4 Methods to Calculate Return on Investment (ROI)
There are total four methods to calculate return on investment calculation.
Now, let us the calculation of ROI formula with below methods:-
#1 – Net Income Method
ROI formula = (Net Income / Investment value) * 100
#2 – Capital Gain Method
ROI Formula = (Current Share Price – Original Share Price) * 100 / Original Share Price
#3 – Total Return Method
ROI Formula = (Current Share Price + Total Dividends Received – Original Share Price) * 100 /Original Share Price
#4 – Annualized ROI Method
ROI Formula = [(Ending value / Beginning value) ^ (1 / no. of years)] – 1
Return on Investment Formula Calculator
You can use the following Return on Investment Formula calculator-
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| Cost of Investment | |
| ROI Formula = | |
| ROI Formula == |
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Relevance and Uses
- Return on investment formula is used in finance by corporations in any form of investment like assets, projects, etc.
- It measures return on investment like return on assets, return on capital etc.
Benefits of Return on Investment
- Simple and easy to understand- It is easy to calculate and it can be calculated by two figures that are benefit and cost.
- Universally understood- This ratio is very popular and commonly used.
Limitations
- Susceptible to Manipulate- The calculation differs based on investor some consider one aspect and others ignore it so it can be manipulated easily.
- Disregards the factor of time- The investor needs to compare two instruments under the same time period and same circumstances. ROI is not dependent on time hence we cannot see the impact of time period through this.
Recommended Articles
This has been a guide to Return on Investment Formula. Here we discuss how to calculate Return on Investment (ROI) using practical examples along with downloadable excel templates. You may learn more about Financial Analysis from the following articles –
