The return on investment (ROI) calculation cannot be talked about firstly without knowing what a return on investment means, The ROI is employed to measure the profitability of an incurred investment. The ROI shows the profitability & feasibility of investment before/within the investment period. The ROI is important in that it enables the trader to know what the outcome of an investment will be before the investment plans rolls out/matures. It's of utmost importance that any viable business venture takes into consideration the analysis of the ROI to prevent losses in capital/assets that should have been prevented in the first place. The ROI is quite useful to eliminate other bugs/errors in accounting that were not seen during the initial plans of the investment. The ROI is usually expressed in percentage (%) not the currency base pair etc.
THINGS YOU NEED TO KNOW ABOUT THE ROI
There are many things that need to be talked about on the ROI. These things could be well known to the populace but others remains to be utilized. They may include any of the following;
The ROI is usually measured in percentages not currency i.e. USD
The ROI is quite complicated to calculate when the data of the businesses assets can't be accounted
The ROI is important in determining feasibility of any potential investment
The ROI is quite useful in determining whether a business asset base is on the increase or declining.
HOW TO CALCULATE THE ROI
There are many methods available to the trader’s disposal on how to calculate the percentage return on investment. These methods can be through the payback method, the internal rate of return on investment, risk-adjusted ROI & net present value method (NPV).
Pay back method; the payback method is the most popular method of knowing the worth of an investment. The payback is calculated by comparing the total cash investment against the benefits most preferably on a monthly basis. Most investments are up-front & then overtime tends to yield returns & surpass the initial investment required. It's best for traders dealing on long-term trades.
Net present value (NPV); The NPV takes into account the entire total benefits of an investment concluding all outcomes to the prevalent dollar rate.
Internal rate of return on investment (IRR); The IRR is the interest that the investment can bring forth for the business & is calculated as the discount value that when employed in the NPV drives the NPV to be equal to zero..
Risk-adjusted ROI; Tends to measure the total gains (total gains - total cost) of an investment divided by the total cost usually expressed in ratio to show the height of potential gains against the cost. An ROI of 170% means that for every $1 there's going to be $1.70 gains. The risk adjusted is preferred for traders that trade on long term basis.
MATHEMATICAL APPROACH TO CALCULATING THE ROI
The following methods listed above are the theoretical approach towards calculating the ROI. The below mentioned method is one of the most widely used method of calculating the ROI. It's calculated by;
It's the IRR method of calculating the ROI as can be seen above.
Importance of calculating the ROI
The ROI is very useful in numerous ways. The ROI when properly utilized can be a money spinner for any business. The benefits are;
Determines the feasibility of an accrued investment
Eliminates errors/ bugs on investments
Determines profitability of any business
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.