Return on investment (ROI) is a mathematical formula to calculate an investment’s profitability. It compares the gain or loss to its cost. The ratio between net income and capital cost of an investment measures it. It also helps to calculate the potential return of investments on things like shares or business ventures.

Synonyms

• Investment gain.
• Financial return.

How To Calculate Return On Investment (ROI)

To calculate return on investment, there are two different formula methods:

First Method: Divide the net income by the cost of investment you earned and multiply it by 100.

ROI = (Net Income / Cost of Investment) x 100.

Second Method: Subtract the cost of investment from the current value of the investment, divide by the cost of the investment, and multiply by 100.

ROI = (Current Value Investment – Cost of Investment / Cost of Investment) x 100.

The above result should be written as a percentage.

Example Of Return On Investment (ROI) Formula Calculation

You invested $10,000 in the company ABC last year and sold your shares for $10,500 this week. Below is how you will calculate your investment ROI:

Using the second method:

Current value investment = $10,500

Cost of investment = $10,000

So your return on ivestmenet (ROI) would be:

ROI = ($10,500 – $10,000 / $10,000) X 100

Your investment return in company ABC is 5%. 

This example did not include capital gains taxes or any fees associated with buying and selling the shares. A real calculation would include these factors in the cost of the investment.

Different Types of Return on Investment (ROI)

There are different types of return on investments to consider when calculating. These include:

1. Net ROI

This type of ROI looks at both the revenue and expenses related to your investment. It gives you an accurate picture of how profitable the investment is. The formula used to calculate Net ROI is:

Net ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

2. Gross ROI

This type of ROI focuses mainly on the revenue an investment can generate without considering the expenses. Gross ROI can be useful to evaluate a project’s potential profitability before diving into the costs. The formula used to calculate Gross ROI is:

Gross ROI = (Revenue – Investment) / Investment

3. Cash ROI

This type of ROI focuses more on the cash flow your investment generates rather than just its profitability. Cash ROI is mainly useful for investments that pay off over the long term or generate cash flows over an extended time. The formula used to calculate Cash ROI is:

Cash ROI = (Cash Inflows – Cash Outflows) / Cash Outflows.

What are the Benefits of Return on Investment (ROI)?

Understanding the benefits of return on investment (ROI) is important for evaluating the profitability of any investment. 

Here are some of the benefits of ROI:

• Easy Measurement of Profitability: Return on investment helps measure the profitability of a specific investment plan and provides a better way to calculate the profitability of a company or team.
• Ease of Calculation: A few figures are needed for the calculation, which can be seen in the financial statements or balance sheets.
• Comparative Analysis Capability: With the formula, more comparisons can be made for investment return plans between organizations.
• Globally Accepted Financial Metric: This formula is widely accepted around the world.
• Helps Choose the Best Plan: ROI helps to analyze the best plan that can gain the highest return in terms of investment costs.

How to Increase Your Return on Investment (ROI)

The best way to increase your investment returns is to know the right analysis to follow. There are a few factors to look out for before making investment plans. Focusing on these factors will better your chances of getting a high return on investment.

1. Know Your Market

Connecting with your target audience will help increase your return on investment. When you dedicate time to understanding your target market or find ways to increase their engagement with your brand. You are setting yourself up for high returns because these people are most likely to buy from you.

2. Make Analytics Your Friend

It is important to use tools with advanced analytics capabilities. When selecting an investment platform or software, always make sure to look out for the reporting features they offer. Metrics like customer engagement and website traffic are useful when it comes to measuring the success of your investment.

3. Be Willing To Experiment

The real value of any idea is tested in the market, so don't hold back from trying something new. You can start small with experimental tactics and measure the ROI over a shorter period to see if it’s worth expanding.

The more you practice, the sharper your decision-making will become. ROI is just one performance metric, but it is an essential tool for business owners who want to maximize their investments.