Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It is a ratio that compares the gain or loss from an investment relative to its cost.
How to Calculate ROI
The formula for calculating ROI is straightforward:
ROI = ((Final Value – Initial Investment Cost) / Initial Investment Cost) * 100
Where:
Initial Investment Cost: This is the total amount of money you initially put into the investment. For example, the cost of purchasing a stock, the development cost of a software project, or the initial outlay for a marketing campaign.
Final Value: This is the total amount of money you receive back from the investment, less any associated expenses incurred during the investment period. For a business venture, this might be the total revenue generated minus operational costs. For a stock, it's the selling price plus any dividends received, minus selling fees.
The result is typically expressed as a percentage. A positive ROI indicates that the investment generated a profit, while a negative ROI signifies a loss.
Why Use an ROI Calculator?
An ROI calculator is a valuable tool for:
Investment Analysis: Quickly assess the potential profitability of different investment opportunities.
Performance Tracking: Measure the success of past investments or projects.
Decision Making: Compare the returns of various options and choose the most financially viable one.
Budgeting and Planning: Estimate the expected returns from marketing campaigns, product launches, or other business initiatives.
For example, if you invested $10,000 (Initial Investment Cost) in a project that ultimately generated $15,000 in revenue after accounting for all associated expenses (Final Value), your ROI would be: