What is Return on Investment-Meaning, Formula, Etc. in Detail (2024)

FAQs

What is the meaning of return on investment and formula? ›

Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100. ROI has a wide range of uses.

Basic ROI Formula and Example

The basic ROI formula is: Net Profit / Total Investment * 100 = ROI.

​The return is the total income an investor gets from his/her investment every year and is usually quoted as a percentage of the original value of the investment. Usually the investor gets a return on his /her investment in shares or investment portfolio when they distribute dividends.

The annual rate of return is the percentage change in the value of an investment. For example: If you assume you earn a 10% annual rate of return, then you are assuming that the value of your investment will increase by 10% every year.

The total return of an investment includes both the capital gains and the income that it generates. As a strategy, the total return approach involves producing the highest possible return on investment. To put it simply, total return = (ending value – starting value) + earnings in that period.

General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.

You can calculate the return on your investment by subtracting the initial amount of money that you put in from the final value of your financial investment. Then you would divide this total by the cost of the investment and multiply that by 100.

The expected return is calculated by multiplying the probability of each possible return scenario by its corresponding value and then adding up the products. The expected return metric – often denoted as “E(R)” – considers the potential return on an individual security or portfolio and the likelihood of each outcome.

The yearly rate of return is calculated by taking the amount of money gained or lost at the end of the year and dividing it by the initial investment at the beginning of the year. This method is also referred to as the annual rate of return or the nominal annual rate.

Consider someone who invested $90 into a business venture and spent an additional $10 researching the venture. The investor's total cost is $100. If the venture generated $300 in revenue but had $100 in personnel and regulatory costs, then net profits would be $200. ROI is $200 divided by $100 for a quotient of 2.

What is the formula for investment in math? ›

The amount of interest earned on an investment or due on a loan is calculated using I = Prt. This formula can also be used to determine: the amount of principal (P) that needs to be invested in order to earn a certain amount of interest over a certain period of time.

Examples of return in a Sentence

I have to return a book to the library. I'm returning your ladder. Thanks for letting me borrow it. The dishes were broken when they were delivered, so I had to return them.

ROI is a calculation of the monetary value of an investment versus its cost. The ROI formula is: (profit minus cost) / cost. If you made $10,000 from a $1,000 effort, your return on investment (ROI) would be 0.9, or 90%. This can be also usually obtained through an investment calculator.

The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project or investment equal to zero. IRR calculations rely on the same formula as NPV does and utilizes the time value of money (using interest rates).

Disadvantages of ROI

Traditional ROI calculations do not take into account the time value of money, which could impact the profitability of an investment. ROI may overlook non-financial factors such as brand reputation, social impact, or customer satisfaction, which could influence the overall success of an investment.

ROA is calculated by dividing a firm's net income by the average of its total assets. It is then expressed as a percentage.

Return on Net Worth (RoNW) denotes the profit earning capacity of the company on the shareholder's invested amount. RoNW is a profitability indicator of a company expressed in percentage. It is calculated by dividing the Net Income of the company by the shareholders equity. Answered on 2023-01-13.

ROI is calculated by dividing a company's net income (earnings after tax) by total investments (total invested capital) and multiplying the result by 100.

ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits. To calculate ROE, divide net income by the value of shareholders' equity.