A return on investment calculator is said to be a calculator that calculates the rate of returns of an investment annually with the use of exact dates. This return on investment calculator allows an investor or trader to compare the result of different investments. This calculator is mostly used on instances where they are multiple investments or withdrawals on different dates and multiple cash flows.

An important advantage of using a return on investment calculator is that is has date accuracy. An investor can use the calculator to do date mathematics calculations where it finds the date which is marked “x” days from the initial start date and can also calculate the number of days between two given dates.

RETURN ON INVESTMENT

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. Actually, return on investments is known 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 profits in relation to invested capital. 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.

BENEFITS OF CALCULATING RETURN ON INVESTMENT

Return on investment helps an investor in making good decisions concerning his business. It helps to decide whether to undertake another investment or not. If the return of investment of the previous business or transaction is termed high, it means that the investment gain is seen as being favorable when compared to investment cost therefore, the investor can venture into another investment but if the return on investment is low, he can decide not to undertake another investment.

Return on investment can also be used as an index to compare dissimilar project investments which is inside a project portfolio. Here, any project with best return on investment is taken as priority. It also illustrates a snapshot of profitability of the investment assets which is tied up to any business.

Return on investment is very popular among investors because of its versatility and simplicity. It is very easy to calculate, interpret and can be used for a different kind of other investments or financial gain like social return on investment which is used to measure extra-financial value relative to resources invested. It can also be used by an investor to identify the various ways to increase performance as well as the performance of investments.

LIMITATIONS OF RETURN ON INVESTMENT

The use of return on investment calculators can be easily manipulated to suit the investor’s purpose by expressing the results in a lot of different ways. Its flexibility and simplicity allow investors to freely choose variables e.g. length of calculation time, details of what variables should be used to calculate income and cost values and if overhead cost should be included.

In conclusion, the use of return on investment as an indicator in business is very risky; an investor should do well to insure that he understands the different types of input that is being used.

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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