Calculation of return on investments

Return on investments a means used to measure the amount of return on a particular investment when compared to the investment cost. Return on investment is a good way of comparing profit in relation to invested capital.Return on investment is said to be a quality measure used to assess the effectiveness of an investment or a good number of different investments. In calculating return of investment, the return of investment (profit) is divided by the cost of investment while the result is expressed in ratio or percentage.

FACTS ABOUT RETURN ON INVESTMENT CALCULATIONS

All calculations involving return on investment is done with a ROI calculator.The ROI calculator allows an investor or trader to compare the result of different investmentsby calculating the rate of returns of an investment annually with the use of exact dates. This calculator is mostly used on instances where they are multiple investments or withdrawals on different dates and multiple cash flows.

Return on investment can be very easy to calculate, it applies to a good number of investments and can also be easy to interpret. If after an investment is done and the investment turns out not to have a positive ROI or if the investor himself has other investments with higher ROI, then the calculated value of the return on investment can give him directions on the investment that is more preferable than the other.

Example, if an investor invested 1,000 dollar in an electronic firm and in the year 2014, he sold his shares for a total of 1,300 dollar two years later. In other to calculate his return on investment, he will have to divide his profits or return by the investment cost which is;

1,300 dollar -1,000 dollar =300 dollar

300/1,000= 0.3 which is equivalent to 30%

Using this return on investment information, the investor can now compare the profitability of his investment in the electronic firm with that of other possible investments. If for example the same investor invested another 2,000 dollar in another firm like Mary winery ltd in 2015 and sold his shares for 2,900 dollars in 2017. The investors return on investment will be

2,900 dollar- 2,000= 900 dollar

900/2,000= 0.45 which is 45%

This only means that the investors 45% return on investment from Mary winery ltd is much larger than his 30% from the electronic firm and this indicates that is investment in the Mary winery was a better and wiser move.

In conclusion, even if calculations on return on investment proves to be a medium of better decision making on investment, one should also keep in mind that the means of calculating ROI and its definition can be modified to suit a particular situation meaning there is nothing like a right calculation since it only measures the profitability of an investment.

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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