Needhi
Huma answered 4 years ago
Return On Investment is a financial ratio which is extensively used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. It is most commonly measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned. Now lets learn about ROI calculation. Here I am going to mention most commonly used ROI formulae:
ROI = Net Income / Cost of Investment
Net income divided by the cost of an investment, is the most commonly used ratio. This is the simplest way to measure ROI. You can understand this with an example
Example: An investor purchases property A, which is valued at $500,000. Two years later, the investor sells the property for $1,000,000.
We use the investment gain formula in this case.
ROI = (1,000,000 – 500,000) / (500,000) = 1 or 100%
ROI calculations are simple and help an investor decide whether to take or skip an investment opportunity. The calculation can also be an indication of how an investment has performed to date. When an investment shows a positive or negative ROI, it can be an important indication to the investor about the value of their investment.
Here I mentioned only one traditional formulae to calculate ROI but there are several formulas and also you can take help from ROI Calculator. The calculator covers four different ROI methods that is net income, capital gain, total return, and annualized return. For more detailed information about Return On Investment you can visit our website.
