Return on Investment (ROI) Calculator
Calculate the profitability of an investment.
Understanding Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI measures the amount of return on a particular investment, relative to the investment's cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a ratio or as a percentage.
How to Calculate ROI
The basic formula for ROI is:
ROI = (Net Profit / Cost of Investment) * 100%
Where:
- Net Profit is the total revenue or gain from the investment minus the total cost of the investment. So, Net Profit = Total Revenue/Gain – Total Cost of Investment.
- Cost of Investment is the total amount of money spent to acquire or maintain the investment.
Example Calculation
Let's say you invested $20,000 in a stock. Over a year, this investment grew and you sold it for $50,000.
- Total Revenue/Gain = $50,000
- Total Cost of Investment = $20,000
- Net Profit = $50,000 – $20,000 = $30,000
- ROI = ($30,000 / $20,000) * 100% = 1.5 * 100% = 150%
This means your investment yielded a profit equal to 150% of its initial cost.
Why is ROI Important?
ROI is a crucial metric for:
- Decision Making: Helps investors decide where to allocate capital by comparing potential returns across different investment opportunities.
- Performance Evaluation: Allows businesses and individuals to assess the success of past investments and identify areas for improvement.
- Profitability Measurement: Provides a clear, standardized way to understand how much profit an investment has generated relative to its expense.
A positive ROI indicates that the investment generated profits, while a negative ROI suggests a loss. The higher the ROI, the more efficient and profitable the investment is considered.