Any person or company that invests money in something is going to want to know whether or not they made money. The return on investment (ROI) is a percentage ratio that shows an investor exactly what rate of profit they made on their investment. This can apply to someone buying stocks, a company utilizing a marketing plan or a real estate investor flipping houses. The higher your ROI, the more efficient your investment is at making money.
The Components Of ROI
In order to calculate ROI, you need to utilize a formula and that formula is going to have components. The components of calculating ROI are initial investment (II)and investment return (IR). For a simple transaction such as buying a stock, these numbers are simple to determine. But when you get into a more complex investment such as an advertising campaign, determining these numbers can get very difficult.
The Formula For Calculating ROI
The formula for calculating ROI is:
((IR – II)/II) x 100 = ROI
To get the final percentage, you must multiply by 100. As an example, say that Bob bought a house for $100,000 and then sold it for $150,000. His ROI would be ((150,000 – 100,000)/100,000)x 100 = 50 percent. Bob made a pretty good deal and created a strong ROI.
The Variables That Need To Be Accounted For
When you make an investment and then put money into that investment to increase your return, then the cost of the upgrade can be added into the initial investment. But what about the time it takes to turn an investment around? For example, if you buy a house to sell then you will be stuck with holding costs such as taxes, utilities and maintenance.
In most cases, the costs associated with time can be put into numbers such as utility bills, tax bills and maintenance costs. All of those costs should be rolled into the initial investment to get a better understanding of the true ROI.
Calculating Investment Return
Complex investments require complex methods for calculating return. Corporations have extremely comprehensive formulas in place that use different types of marketing data to determine the ROI on an advertising program. During the course of the program, the company will often adjust the advertising material to increase the ROI.
Why Calculate ROI?
You can use ROI to tell whether or not you are getting the kind of return on an investment that you want. Companies use ROI to compare investments and determine ways to increase profit on the next investment. While it is fun to compute the ROI on a single investment an individual makes, it is more efficient to have several similar investments to compare.
Everyone wants to get the most for their money, and ROI is calculated to see what percentage of an investment’s return is actual profit. The higher the ROI, the more profit that was generated. Companies compare ROI on similar investments to make sure that they are maximizing all of their profit making potential.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!