Return On Investment or ROI, is a mathematical formula that investors can use to evaluate their investment and assess how well the investment instrument performs compared to others.
ROI can be used to evaluate various investment decisions, such as comparing them to initial costs. You can calculate ROI to assess your trading results, and compare them with other investment instruments that you have.
The way to calculate ROI is to subtract the initial value of the investment from the final value of the investment, which represents the net return. Then, this net return is divided by the value of the initial investment which has been multiplied by one hundred.
Since ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure different types of investments against one another.
Why multiplied by one hundred? The answer is, because ROI is a percentage. So, ROI does not take into account the holding period or the passage of time.
In addition, ROI can also be calculated in several different ways, including:
- Gross Profit – Expenditure / Total Investment x 100
- (Investment Profit – Investment Cost) / Investment Fee x 100
- (Revenue – Cost of Goods Sold) / Cost of Goods Sold x 100
1. ROI is easy to calculate to find out the return on your investment. However, keep in mind, some numbers are required to complete the calculations all of which must be available in the financial statements or balance sheet.
2. ROI has comparative analysis capabilities. Due to their wide use and ease of calculation, comparisons can be made for returns on investment between organizations.
3. Measurement of profitability. ROI relates to net income for investments made in certain business units. This provides a better measure of profitability by company or team.