Calculating return on investment formula

Investment is an asset or security that is acquired with the future view of it bringing forth income. According to economic terms, investment is a monetary acquisition bought with the idea that it will bring about income in the future or can be sold at a greater price for profit. To put it simply, it is anything that can bring money in future. This includes the purchase of bonds, stocks, real estates, companies, machineries etc, and they can be grouped in three different categories as follows.

OWNERSHIP INVESTMENT:

This has to do with assets that are run for income and profit making purposes. The owner of the asset put some money in, control how things are being done, and expect some returns afterwards. Example of ownership investment includes stocks, lands, businesses, real estate property etc.

LENDING INVESTMENT:

This is a set up that can generate some income for the owner and specified others. A good example is a bank account. With it, one can save some money and earn some interests as income, but at the same time, banks reserve the right to use the money in the account for financially beneficial ventures, on the condition that the owner of the money gets it when needed.

CASH EQUIVALENT:

This is a type of business deal that short termed but with high credit quality and liquidity. This is one good way to measure a company’s level of financial system efficiency.  

RETURN ON INVESTMENT (ROI)

This is a performance tool used to measure the efficiency of an asset. It is the benefit of monetary reward one gets as a result of his business deals into some resources. ROI measures the level of returns considering what was put in and what proceeds made from it. As a performance measuring tool, ROI is used to evaluate and compare efficiencies of different businesses against each other

CALCULATING RETURN ON INVESTMENT

To calculate ROI, the return is divided by the cost and the result expressed as a percentage or a ratio. The formula for calculating ROI is:

ROI = (GI – CI)

               CI

Where: GI is gain from investment

            CI is cost of investment.

 OR

ROI = Net profit    *   100

          Investment        1

Where net profit =gross profit – expenses

In the above formula, gain from investment and gross profit refer to the proceeds obtained from the said investment. Since ROI is measured as a percentage, it can be compared easily with returns gotten from other investments which allow the investor to measure variety of other investment against one another without much complexity.

Return on investment is really a very famous metric due to its versatility, accessibility and simplicity. ROI can be used as a rudimentary gauge to check an investment profit rate. It is easy to use and interpret plus it can be applied to a variety of investment. ROI values helps to instruct an investor on the best possible investment with the highest profit level. Finally, it is an important aspect of managing investment since it can speak volumes on whether an investment is making profit or not.

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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