Investment return or return of investment (ROI) is a method used by investors in analyzing an already existing business to see how well it is going and t o help them make adequate investment decisions. If you own a business, and you have been running it for a while now, business courtesy demands that you check in every now and then with the records of what has happened in the business so far, and try to figure out where the business is headed in the nearest future and in the long run. Calculating return on investment of your business is one way to do this.
DEFINITION OF ROI:
Return on Investment can be defined as the ratio of the profit or loss made in a fiscal year based on the terms of a business venture. Note that ROI is totally different from the investment cost; which is the amount that was put into the investment in the first place. ROI is the increase or decrease of the investment cost. For instance, if you buy a currency pair in the forex market for $100, and the pair appreciates by 10%, then you will have a forex investment worth $110; $10 being the ROI on that business. It can also go the other way round; there may be some unfortunate circumstances that may lead to the depreciation of the currency pair you bough, say by 5%. This means that your commodity is not worth $95, and the ROI on this case can be said to be -$5.
FORMULA FRO CALCULATING INVESTMENT RETURNS:
The basic formula for calculating ROI is
(Net profit / total investment) X 100
- Net profit in this case is the actual profit realized from an investment after working deduction of the business capital or investment cost.
- Total investment is the investment cost – what it cost to set up the investment in the first place.
If you bought a real estate property for $100,000 in an auction, and you spend $50,000 to renovate it, after which you sold it for $200,000, what is you return on investment?
- ROI = (Net profit / total investment) X 100
- Total investment = $100,000 + $50,000 = $150,000
- Net profit = $200,000 - $150,000 = $50,000
Therefore, ROI = (50,000 / 150,000) X 100 = 33.3%
Therefore, the net profit of this investment is 33.3%.
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