ROI Calculator
Calculation Results
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Return on Investment (ROI) is a fundamental financial metric used to evaluate the efficiency of an investment or compare the efficiencies of several different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.
The Basic ROI Formula
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
Understanding the Components
- Cost of Investment: This is the total amount of money you put into the project or asset. It should include all associated costs like purchase price, taxes, and maintenance fees.
- Current Value of Investment: This is the value of the investment at the time of calculation, or the proceeds obtained from the sale of the investment.
- Net Profit: This is the difference between the final value and the initial cost. If the number is negative, it represents a net loss.
Why ROI is Important
ROI is a popular metric because of its versatility and simplicity. It can be used as a rudimentary gauge of an investment's profitability. This could be the ROI on a stock investment, the ROI a company expects on expanding a factory, or the ROI generated in a marketing campaign. If an investment's ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options.
Real-World Example
Imagine you purchased $1,000 worth of shares in a company in 2022 and sold those shares for $1,250 in 2023.
- Cost: $1,000
- Amount Returned: $1,250
- Net Profit: $1,250 – $1,000 = $250
- ROI Calculation: ($250 / $1,000) * 100 = 25%
In this scenario, your return on investment is 25%, meaning for every dollar you invested, you earned 25 cents in profit.
Limitations of ROI
While useful, ROI does have limitations. The most significant is that it does not account for time. An investment that yields a 50% ROI over 10 years is significantly less impressive than one that yields a 50% ROI over one year. For more complex comparisons, investors often use the Annualized ROI or Internal Rate of Return (IRR).