Average return on investment is simply an average of all the returns in an investment for a period of time. For every investment activity, it is wise to find out what its ROI (return on investment) is worth for the sake of record keeping. This will help the investor to know what is working and what is not, and then what adequate decision to take to ensure the smooth flow of business activities. The ROI also help potential investors to decide to either put money into a particular business or not. If a business owner is scouting for investors, he or she will have to put out his or her reports on how the business is doing so far, including the average ROI reports, so that the potential investors can judge for themselves and make the appropriate decision as they deem fit.

RETURN ON INVESTMENT:

There is no way one can get to the average return of an investment without first having ROI. The ROI is defined as the ratio of profit or loss made in a fiscal year based on the term of a business. The formula for calculating it is

ROI = (Net profit / total investment) X 100

-    The net profit being the amount of money realized from the business

-    Total investment being the cost of setting up the investment

EXAMPLE:

A man bought a commodity with the sum of \$40,000, and records a return of \$5,000 monthly. What is the ROI this business?

-    Total investment = \$40,000

-    Net profit = \$5000

-    ROI = (5000 / 40000) x 100 = 12.5%

This ROI is the value of just one business transaction. Assuming the investor is into this sort of business for a long time, and keeps good record of all transactions. Then it is possible to calculate the average return on investments made over a period of time. All that needs to be done is to find the average of all the ROI of transactions that has taken place within the period of interest, and that is it.

CONCLUSION:

This is a very good record for business owners to keep, especially if they are in the business for the long haul. They can easily evaluate how well they are doing in their business and as well share their records with potential investors with ease.

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.

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