Do you want to understand the ROI equation? Are you curious about how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of an ROI calculation?
We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.
Example 1
As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000.
To calculate return on investment, you should use the ROI formula:
ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%
So the return on your investment for the property is 50%.
Example 2
As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years.
First of all, note that your total gain from this investment is the gain from the first year plus the gain from the second year.
So: G = $200,000 + $200,000 = $400,000.
Then, you can use the ROI formula:
ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%
The ROI of the marketing program is 60%.
Example 3
You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. The total value of the transaction was then: 150 x $12.67 = $1,900.50. After nine months, thanks to the favorable economic conditions, the stock price rose to $15.23, and you decided to sell them (the value of the transaction was: $15.23 × 150 = $2,284.50.
The ROI of this investment is:
ROI = ($2,284.50 – $1,900.50) / ($1,900.50) × 100%= ($384) / ($1,900.50) × 100% = 0.2021 × 100% = 20.21%
A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, let's see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:
ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%
This time, the outcome of your investment is far from profitable.
FAQs
Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
How do you calculate effective ROI? ›
You may calculate the return on investment using the formula: ROI = Net Profit / Cost of the investment * 100 If you are an investor, the ROI shows you the profitability of your investments. If you invest your money in mutual funds, the return on investment shows you the gain from your mutual fund schemes.
How do you calculate 20% ROI? ›
How to calculate the ROI percentage?
- Find out the initial and final value of the investment.
- Subtract the initial value of the investment from the final value.
- Divide the result from Step 2 by the initial value of the investment and multiply the result by 100.
- Congrats! You have calculated the ROI percentage.
The return on investment (ROI) can be calculated using the following formula: ROI = (Selling Price - Buying Price) / Buying Price * 100 To calculate the ROI of your mutual funds, we can substitute the values into the formula: ROI = (41,938 - 35,982) / 35,982 * 100 Step 1: Calculate the difference between the selling ...
How do you calculate ROI for dummies? ›
ROI is a calculation of the monetary value of an investment versus its cost. The ROI formula is: (profit minus cost) / cost. If you made $10,000 from a $1,000 effort, your return on investment (ROI) would be 0.9, or 90%. This can be also usually obtained through an investment calculator.
What is the formula for ROI example? ›
ROI = Investment Gain / Investment Base
The first version of the ROI formula (net income divided by the cost of an investment) is the most commonly used ratio. The simplest way to think about the ROI formula is taking some type of “benefit” and dividing it by the “cost”.
What is the formula for return on ROI? ›
Return on Risk-Adjusted Capital is calculated by dividing a company's net income by the risk-weighted assets.
What is the formula for average ROI? ›
To calculate the average rate of return, add together the rate of return for the years of your investment, and then, divide that total number by the number of years you added together. Add together the annual rate of returns. Divide the sum by the number of annual returns you added.
How to check interest rate? ›
To calculate interest rates, use the formula: Interest = Principal × Rate × Tenure. This equation helps determine the interest rate on investments or loans. What are the advantages of using a loan interest rate calculator? A loan interest rate calculator offers several benefits.
How to calculate the profit? ›
When the selling price and the cost price of a product is given, the profit can be calculated using the formula, Profit = Selling Price - Cost Price. After this, the profit percentage formula that is used is, Profit percentage = (Profit/Cost Price) × 100.
Take the ending balance and either add back net withdrawals or subtract out net deposits during the period. Then, divide the result by the starting balance at the beginning of the month. Subtract 1 and multiply by 100, and you'll have the percentage gain or loss that corresponds to your monthly return.
How do you calculate ROI in Excel? ›
Calculating ROI is simple, both on paper and in Excel. In Excel, you enter how much the investment made or lost and its initial cost in separate cells, then, in another cell, ask Excel to divide the two figures (=cellname/cellname) and give you a percentage.
How much will 100k be worth in 30 years? ›
Answer and Explanation: The amount of $100,000 will grow to $432,194.24 after 30 years at a 5% annual return. The amount of $100,000 will grow to $1,006,265.69 after 30 years at an 8% annual return.
Should I sell or hold my mutual funds now? ›
However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
What is the ROI of an investment that you purchased at $5382 and sold at $7129? ›
Answer. Final answer: The return on investment (ROI) for an investment bought at $5,382 and sold at $7,129 is calculated using the formula (Final Value - Initial Value) / Initial Value x 100%, resulting in an ROI of 32.45%. Therefore, the ROI of the investment is 32.45%.
What is a good ROI investment? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
What is a good ROI for investment property? ›
While what constitutes a 'good' rate can vary depending on an individual's investment strategy, location, and market conditions, generally, a return between 6% and 8% is considered decent, while a return of 10% or more is viewed as excellent.
