Return on Investment ( ROI )

Investment Formula Description

Return on Investment ( ROI ) is an investment formula to assess the efficiency of an investment.

Investments here can be stock investment, real estate investment , mutual fund investment or whatever investment products that the investors can think of. It is very common that investors compare multiple investments by using return on investment ( ROI ) to find out investment with higher return on investment ( ROI ). Investors like to use return on investment ( ROI ) because it is simple to use and it can be replace with other variables to become other variations of return on investment ( ROI ). To calculate return on investment ( ROI ), investors just have to divide the return with the cost of investment. Return on Assets ( ROA ) is a variation of return on investment ( ROI ) by replacing cost of investment with total assets. Hence, the calculation on return on investment ( ROI ) can be adjusted based on the situation depends on what the investors include as return and cost. Some examples for return can be revenue or net profit. Anyhow, the simplicity and flexibility has some disadvantages too. Some analysts or accountants might manipulate the inputs for return on investment ( ROI ) to show investors better figure in financial report. Hence, it is crucial for investors to know the inputs for return on investment ( ROI ) when they read it and use it. Sometimes, return on investment ( ROI ) is also referred as rate of return ( ROR ) or rate of profit ( ROP ).

To conclude, return on investment ( ROI ) actually shows investors how many percent of return they can expect to obtain if they invest in this investment and it is normally presented in percentage or ratio. Definitely, the higher the outcome, the better the investment.

  

Investment Formula

Return on Investment ( ROI ) = Return / Cost of Investment

 

Investment Formula Examples

Corporation ABC has invested $1,200,000 for new investment opportunity.  At the end of the financial period, corporation ABC obtained $240,000 revenue and $120,000 net profit. The return on investment ( ROI ) calculation can be performed as following.

Return on Investment ( ROI ) = Revenue / Cost of Investment = 240,000 / 1,200,000 =  0.2 or 20%

If the accountant uses revenue as the input for return, Corporation ABC managed to earn 20% from its cost of investment. The return on investment ( ROI ) for corporation ABC is 0.2 or 20%. However, net profit can be used as input for return too.

Return on Investment ( ROI ) = Net profit / Cost of Investment = 120,000 / 1,200,000 =  0.1 or 10%

In this case, the return on investment ( ROI )  for corporation ABC is 10% when net profit is used as input for return.If the accountant would like to have better perception on the return on investment ( ROI ) for corporation ABC, he will use revenue as input for return instead of net profit. Hence, it is vital for investors to know what are the inputs for the return on investment ( ROI ) formula.