Do you want to understand the ROI equation? Are you curious about how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of an ROI calculation?
We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.
Example 1
As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000.
To calculate return on investment, you should use the ROI formula:
ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%
So the return on your investment for the property is 50%.
Example 2
As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years.
First of all, note that your total gain from this investment is the gain from the first year plus the gain from the second year.
So: G = $200,000 + $200,000 = $400,000.
Then, you can use the ROI formula:
ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%
The ROI of the marketing program is 60%.
Example 3
You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. The total value of the transaction was then: 150 x $12.67 = $1,900.50. After nine months, thanks to the favorable economic conditions, the stock price rose to $15.23, and you decided to sell them (the value of the transaction was: $15.23 × 150 = $2,284.50.
The ROI of this investment is:
ROI = ($2,284.50 – $1,900.50) / ($1,900.50) × 100%= ($384) / ($1,900.50) × 100% = 0.2021 × 100% = 20.21%
A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, let's see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:
ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%
This time, the outcome of your investment is far from profitable.
