ROI Calculator (Return on Investment)
Understanding Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI is typically used to measure the return on an investment relative to its cost. A positive ROI indicates that the investment has generated a profit, while a negative ROI indicates a loss.
How is ROI Calculated?
The basic formula for ROI is:
ROI = ((Current Value of Investment – Initial Investment – Additional Investment) + Revenue Generated) / (Initial Investment + Additional Investment) * 100%
In simpler terms, you take the total profit (or loss) from an investment and divide it by the total cost of that investment. The result is expressed as a percentage.
- Initial Investment: The original amount of money put into the investment.
- Current Value of Investment: The present market value of the investment.
- Additional Investment: Any further capital added to the investment over time.
- Revenue Generated: Any income or profits directly produced by the investment (e.g., dividends, interest, rental income).
Why is ROI Important?
ROI is a crucial metric for both individual investors and businesses. It helps in:
- Measuring Profitability: It directly shows how much profit an investment has made relative to its cost.
- Comparing Investments: It allows for a standardized comparison between different investment opportunities, regardless of their scale.
- Making Informed Decisions: Understanding the potential ROI helps in deciding where to allocate capital for the best returns.
- Tracking Performance: Regularly calculating ROI helps in monitoring the performance of ongoing investments and making necessary adjustments.
Example Calculation:
Let's say you invested $10,000 (Initial Investment) in a stock. Over time, you added another $2,000 (Additional Investment). The stock has now grown to be worth $15,000 (Current Value). During this period, you also received $500 in dividends (Revenue Generated).
Using the formula:
Total Investment Cost = $10,000 (Initial) + $2,000 (Additional) = $12,000
Total Gain = ($15,000 (Current Value) – $10,000 (Initial)) + $500 (Revenue) = $5,500
Net Profit = $5,500 (Total Gain) – $2,000 (Additional Investment) = $3,500
ROI = (($15,000 – $10,000 – $2,000) + $500) / ($10,000 + $2,000) * 100%
ROI = ($3,000 + $500) / $12,000 * 100%
ROI = $3,500 / $12,000 * 100%
ROI = 29.17%
This means your investment has yielded a return of 29.17% on the total capital invested.
Remember, ROI is just one metric to consider. It's important to also look at the time period over which the return was achieved (annualized ROI) and the risk associated with the investment.