What is Return on Investment
Return on investment is a financial ratio that measures the profitability of investing in something such as investing in a business, financial investment, or even a marketing campaign. A return on investment (ROI) shows how much percentage of the profit compared with the principal money.
Normally, return on investment is used to evaluate future or previous investment effectiveness. Return on investment is a simple and straightforward measure, it doesn’t include the time value of money in the equation. The return on investment can be calculated using a simple formula that is net income divided by the initial investment.
A higher return on investment reflects that the investment reward a higher return. Conversely, a lower return on investment means the investment reward a lower return. However, a good return on investment depends on a different investment because a high or low in different investments is not the same.
Thus, the return on investment (ROI) is good when you try to ensure you’re making more than you’re spending. To compare the return on investment you need to compare them between the exact same conditions.
There are many ways you can use ROI to identify potential investments in your business. Examples are shown below:
- Purchasing an asset or equipment: Estimate the profit that the company can be generated from an asset or equipment in the future.
- Hiring: Estimating the cost and return from hiring new staff helps you to determine what type of staff is good to hire for the business at the moment.
- Marketing campaign: Estimate the cost and return on sales of a product that you want to implement a marketing campaign (such as launching a new product and advertising campaign).
Return on Investment Formula
Return on investment (ROI) can be calculated using a simple formula that is net income divided by the initial investment and multiplied by 100 to express the ratio as a percentage, as the following return on investment formula:
ROI = (Net Income / Investment Principal) x 100
ROI = (Current Value of Investment – Investment Principal) / Investment Principal x 100
The return on investment (ROI) is expressed as a percentage.
For example, you bought 1 share of stock for $1,000 and sold the share 1 year after you bought it for $3,000 (let’s say there is no commission). The ROI is the following: ROI = (2,000 / 1,000) x 100 = 200%
Frequently Asked Questions
Return on investment is a financial ratio that measures the percentage of profitability when investing in something such as stocks, cryptocurrencies, businesses, and marketing campaigns.
Return on investment in marketing refers to the profitability ratio that measures the return from investing in a marketing campaign such as an advertising campaign.
Return on investment (ROI) can be calculated by dividing net income by the initial investment and multiply by 100 to express the ratio as a percentage, as the following formula: ROI = (Net Income / Investment principal) x 100
A higher number is a good value for the return on investment. The higher ROI, the more return from investment.