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 tries to directly measure the amount of return on a particular investment, relative to the investment's cost.
In simpler terms, ROI tells you how much money you've made or lost on your investment compared to how much you initially put in. It's a crucial metric for investors, business owners, and financial analysts to gauge the success of a venture.
How to Calculate ROI
The basic formula for ROI is:
ROI = ((Current Value / Final Revenue – Initial Investment Cost) / Initial Investment Cost) * 100
Or, more commonly expressed as:
ROI = (Net Profit / Cost of Investment) * 100
Where:
Net Profit = Current Value / Final Revenue – Initial Investment Cost
Cost of Investment = Initial Investment Cost
The result is typically expressed as a percentage. A positive ROI indicates that the investment generated profits, while a negative ROI indicates a loss.
Example Calculation
Let's say you invested $10,000 (Initial Investment Cost) in a stock. After a year, the value of your stock has grown to $15,000 (Current Value / Final Revenue).
Using the formula:
Net Profit = $15,000 – $10,000 = $5,000
ROI = ($5,000 / $10,000) * 100 = 0.5 * 100 = 50%
This means your investment yielded a 50% return.
Interpreting the Results
Positive ROI: Indicates profit. A 50% ROI means you made back your initial investment plus an additional 50% of that amount in profit.
Negative ROI: Indicates a loss. A -20% ROI means you lost 20% of your initial investment.
0% ROI: Indicates you broke even; you neither made a profit nor incurred a loss.
Use Cases for ROI
ROI is a versatile metric applicable in various financial contexts:
Stock Market Investments: Evaluating the profitability of stocks, bonds, or mutual funds.
Real Estate Investments: Assessing the returns from rental properties or property sales.
Business Ventures: Measuring the success of new product launches, marketing campaigns, or overall business operations.
Personal Finance: Comparing different savings or investment options.
While ROI is a powerful tool, it's important to consider the time frame over which the return was achieved. An ROI of 10% over one year is generally more attractive than a 10% ROI over five years. Therefore, it's often used in conjunction with other metrics like annualized ROI or Internal Rate of Return (IRR) for a more comprehensive analysis.
function calculateROI() {
var investmentCostInput = document.getElementById("investmentCost");
var currentValueInput = document.getElementById("currentValue");
var roiValueDisplay = document.getElementById("roiValue");
var roiPercentageDisplay = document.getElementById("roiPercentage");
var investmentCost = parseFloat(investmentCostInput.value);
var currentValue = parseFloat(currentValueInput.value);
// Clear previous results and error messages
roiValueDisplay.textContent = "–";
roiPercentageDisplay.textContent = "–";
// Input validation
if (isNaN(investmentCost) || isNaN(currentValue)) {
alert("Please enter valid numbers for both investment cost and current value.");
return;
}
if (investmentCost <= 0) {
alert("Initial Investment Cost must be a positive number.");
return;
}
// Calculate Net Profit
var netProfit = currentValue – investmentCost;
// Calculate ROI Percentage
var roiPercentage = (netProfit / investmentCost) * 100;
// Display results
roiValueDisplay.textContent = "$" + netProfit.toFixed(2); // Display Net Profit with currency
roiPercentageDisplay.textContent = roiPercentage.toFixed(2) + "%"; // Display ROI as percentage
}