Return on Investment Formula (ROI)

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. The ROI calculation is done to analyze the performance of investment

It is represented as follows  –

This formula is flexible and used by the different investors to compare ROI on different potential investments and returns on stocks.

Calculation Examples of Return on Investment

Let’s see some simple to advanced examples to understand the concept better.

Example #1

An investor buys $10,000 of stocks and sells the shares 1 year later with the amount of $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 an 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 the same after a few years, and he sells the 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, the 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 the shoe business is higher than the bakery business.

Top 4 Methods to Calculate Return on Investment (ROI)

There are a total of four methods to calculate return on investment calculation.

Now, let us the calculation of  ROI formula with the 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-

 

Relevance and Uses

• The return on investment formula is used in finance by corporations in any form of investment like assets, projects, etc.
• It measures the return on investment like return on assets, returns 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 investors; 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 the time period through this.

Recommended Articles

This article 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 –

• High-Low Method
• Calculate ROIC
• Return on Sales
• ROCE Definition
• TTM Revenue / LTM Revenues