The ROI calculator is a tool that helps estimate the profit or loss on an investment and compare the efficiency of different investments. Knowing how to calculate ROI can aid in making informed financial decisions.
Finally, below you will find instructions on how to use our return on investment calculator to make faster and smarter financial decisions.
Table of Contents
What is ROI?
For example, an ROI of 0.1 is equivalent to 10%. ROI stands for return on investment, which is the ratio between the net gain and the net cost of an investment. It is presented as a percentage and compares the net income to the net expenses required to finance the investment.
ROI is one of the most commonly used methods for evaluating the economic consequences of an investment, alongside other measures of profitability such as NPV, IRR, and payback period.
Its main advantage is its simplicity, as it can be easily calculated using readily available data and its value is easy to understand and interpret. Additionally, because ROI is expressed as a percentage, it allows for easy comparison of the profitability of different investments. Therefore, you can select the most advantageous option thanks to ROI.
It is important to note that in finance, there are several measures that may be referred to as return on investment, such as Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity, or Earnings per Share.
We will discuss ROI in greater detail below. It is important to note that in finance, there are several measures that may be referred to as return on investment, such as Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity, or Earnings per Share. The most commonly used measure is the return on investment (ROI).
It is important to understand how the ROI is computed to make informed decisions. Please read our article carefully for more information.
ROI Formula
Investors need to understand how to calculate ROI to estimate the efficiency of their investments. The ROI formula plays a crucial role in investment decisions as it is based on two pieces of information: the gain from investment and the cost of investment. The equation to calculate ROI is:
ROI = ( G – C ) / C
Where:
- G – gain from investment
- C – cost of investment
The ROI equation calculates the gain from investment (G) divided by the cost of investment (C). It is important to note that this equation does not take into consideration any associated risks, which is a major limitation of ROI. For more information, please refer to the section on the advantages and disadvantages of ROI.
ROI Calculation Examples
Do you want to understand the ROI equation? Are you curious about how to calculate and interpret ROI?
We have prepared examples to help you find answers to these questions. After studying them carefully, you will understand the concept of ROI and be capable of making smart financial decisions based on ROI metrics.
Example 1
As an investor in the real estate market, if you purchase a property in New York for $600,000 and sell it three years later for $900,000, your return on investment (ROI) can be calculated using the formula:
ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%.
Therefore, the ROI for the property is 50%.
Example 2
As a marketing manager in a large international company, you introduced a new marketing program with a budget of $250,000. The program resulted in a $200,000 growth in profits over each of the following two years.
So: G = $200,000 + $200,000 = $400,000.
It is important to note that the total gain from this investment is the sum of the gains from the first and second years.
ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%
This means that the marketing program has a ROI of 60%.
Example 3
As an investor in the stock exchange, you purchased 150 shares of Alpha in January at $12.67 per share, resulting in a total transaction value of $1,900.50. After nine months, due to favorable economic conditions, the stock price rose to $15.23, and you decided to sell them. The value of the transaction was $2,284.50 ($15.23 x 150).
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%
Your ROI was 20.21%, indicating a profitable investment. However, if the price of Alpha had instead dropped, let's say to $9.14, the outcome of your investment would have been far from profitable.
ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%
ROI Calculator
The numbers used in the examples in the previous paragraph are fairly simple; the numbers used in real business investments tend to be a bit more complicated. When we're dealing with much larger amounts of money or more complex numbers, it's much more convenient to use our ROI calculator.
Although the ROI calculator is based on the same formula, it is much faster and easier to use. With our tool, it's enough to enter the amount invested and the amount returned to get your estimated ROI.
Return on investment calculator is a tool for anyone who has a business or is planning to start one. It is also highly recommended for any investor, from shopkeepers to stockbrokers.
Curious about how to use our ROI calculator? Getting the value of ROI with our smart ROI calculator is easier than you thought. You don't need to memorize the ROI formula or do any calculations to estimate the profitability of your investment in a few seconds, you just need to fill in the appropriate fields in our calculator:
- Invested amount refers to the amount of money you have invested or plan to invest.
- Returned amount refers to the total amount of money you have received or plan to receive after the investment has closed.
Our return on investment calculator quickly computes and displays the ROI as a percentage.
Additionally, it can be used in reverse to determine the expected earnings based on the initial principal and estimated ROI percentage.
In conclusion, our ROI calculator can help you make the most beneficial financial decision for you by completing cost-benefit analyses quickly and easily. Additionally, our mobile ROI calculator allows you to compute ROI on-the-go.
ROI and Financial Decisions
Return on investment (ROI) is a useful measure for estimating the net investment benefit surplus on an accrual basis. It can also aid in making rational financial decisions. ROI is primarily used as an auxiliary method during the initial assessment of an investment project.
The decision criterion is generally defined as follows:
- ROI ≥ LV – investment is profitable
- ROI < LV – investment is unprofitable
LV represents the predefined limit value.
For the simplest case where an investor has capital to invest and only one investment alternative, the decision criterion is formulated as follows:
- ROI ≥ 0 – investment is profitable
- ROI < 0 – investment is unprofitable
In real-life investments, a limit value may be set for ROI analysis at a level different from zero. For instance, a return on investment in your industry branch (ROIb) can be set as a limit value. The absolute decision criterion is:
- ROI ≥ ROIb – investment is profitable (acceptable)
- ROI < ROIb – investment is unprofitable (not acceptable)
In professional applications, financial analysts and decision-makers typically use the weighted average cost of capital (WACC) as a limit value. The decision criterion in this case is:
- ROI ≥ WACC – investment is profitable (acceptable)
- ROI < WACC – investment is unprofitable (not acceptable)
ROE versus ROI
Return on investment (ROI) and return on equity (ROE) are two methods of evaluating investment profitability. However, ROI measures the profitability of an investment relative to its cost, while ROE measures the profitability of a company's equity.
While they share similarities, they also have differences. Both ROI and ROE are single-period methods and do not have the same value for the entire duration of the investment. It is important to note that neither of these indicators includes any measure of risk. Additionally, neither ROI nor ROE considers TVM (which is explained further in our time value of money calculator).
The primary distinction between ROI and ROE is that the former factors in the total investment expenditure (including both equity and debt), while the latter only includes equity in its formula.
Advantages and Disadvantages of ROI
ROI has several advantages, including:
- Calculating ROI is simple and straightforward, especially with our ROI calculator.
- The calculation results are easily interpretable and comparable with other investments.
- The results are easy to interpret and compare with other investments. You only need two figures to obtain the ROI: gain from investment and cost of investment.
However, the ROI formula has notable limitations.
- It does not account for changes in the value of money over time, meaning that a higher ROI does not necessarily indicate a better investment option. It does not account for changes in the value of money over time, meaning that a higher ROI does not necessarily indicate a better investment option.
- To address this limitation, other financial metrics such as net present value or internal rate of return may be used in conjunction with ROI.
- For example, if we compare two investments with the same ROI of 20%, but Investment A lasts only one year while Investment B lasts four years, the latter may be a better option in the long run.
- Investment A will yield a profit within one year, while investment B requires three years to achieve the same gain. Despite having the same ROI, investment A is the better option.
- When comparing two investment options with ROI, ensure that the calculations are performed over the same time period.
- The determination of the LV (limit value) is subjective and may bias the analysis, leading to improper decisions.
- Return on investment (ROI) can be manipulated due to the various approaches used to measure gains and costs.
- To ensure valid and comparable results, ROI calculations should only consider gains and costs related to the investment and not other external factors.
Investment Recommendations for Improved ROI
- In the stock market, reducing your average cost per share can lead to higher returns on your investment.
- Look for companies with high earnings per share growth, specifically those reporting over 10% EPS CAGR, as they are most likely to provide a high ROI if they sustain such earnings growth.
- When investing in the stock market, it is important to consider your company's operating efficiency. One way to measure this is by looking at the EBITDA margin. It is important to look for a positive and growing EBITDA margin, as this indicates that the company is improving over time and may provide a significant ROI in the future.
- Additionally, it is recommended to periodically track your portfolio's beta, which indicates the level of risk compared to the broader market. Diversification can help mitigate risk. For higher returns, it is recommended to have a higher portfolio beta, but be prepared for larger drawdowns.
- Another way to boost your ROI is through stock options, which come in two types: calls and puts. Each can provide additional profits if the market continues to rise or falls. If you prefer limited risk but still want extra profit, consider the bull call spread strategy.
Frequently asked questions
How to calculate ROI percentage?
To calculate ROI percentage, follow these instructions:
Calculate the ROI percentage by subtracting the initial value of the investment from the final value, dividing the result by the initial value, and multiplying by 100. Congratulations!
Calculating ROI for Real Estate Investments
To calculate the return on investment (ROI) for a real estate investment, follow these steps:
1. Subtract the purchase price of the property from its selling price.
2. Divide the result obtained in Step 1 by the purchase price.
3. Multiply the result by 100 to calculate the ROI for real estate investment.
What is the ROI if the investment cost is $2000 and the net gain is $1200?
The ROI, or return on investment, is calculated by dividing the net gain by the cost of investment. In this case, with a net gain of $1200 and a cost of investment of $2000, the ROI is 0.6 or 60%.
What is the meaning of 30% ROI?
An ROI of 30% indicates that the profit or gain from an investment is 30%. For instance, if the investment cost is $100, the return from investment is $130, resulting in a profit of $30.