Return on investment (ROI) is one of the financial metrics that measure the return or gains from a single investment. Basically, it is a ratio of the profit from investment in relation to the cost.
This calculation is really useful to evaluate a potential return from a standalone investment. Later on, the investor can compare the returns of several investments and focus on the ones that bring them a big amount of income.
In business analysis, according to Investopedia, ROI is one of the key metrics to evaluate and rank different investment alternatives based on their attractiveness.
How to Calculate Return on Investment
The calculation of ROI is straightforward. Here are two possible ways that you can use to calculate ROI.
The first formula
ROI = Net Return on Investment / Cost of Investment x 100%
The second formula
ROI = (Final Value of Investment – Initial Value of Investment) / Cost of Investment x 100%
Ways to Interpret the Result on Return of Investment Calculation
In interpreting the result of your ROI calculation, you need to remember several things. The first, within the numerator, you will see ROI’s net return, not net profit or net gain. That is because, most of the time, the returns from an investment is negative, not positive.
The second, if you get a positive ROI figure, the net returns are in the black since the total returns are higher than the total cost. Contrarily, a negative ROI is in red. If you get a negative ROI, then your investment produces a loss since the total cost is higher than the return.
The third, in order to have an accurate ROI, you need to also consider the total return and the total cost.
Benefits of ROI
The main benefit of ROI is its uncomplicated calculation and result. That way, an investor can easily calculate his or her ROI as well as understand the meaning behind that ROI figure.
Due to its simplicity, ROI is universally standardized.
