ROI calculator is a kind of investment calculator which enables you to estimate the profit or loss of your investment. Return on investment calculator can also be used to compare the efficiency of a few investments. Thus, you can find the ROI formula helpful when you are going to make your financial decision. If you know how to calculate ROI, it's easier to foresee the results of an investment.
In the following part of the article you will find answers for the following questions:
- What is ROI?
- What is ROI formula?
- How to calculate ROI?
- What is a difference between ROI and ROE?
- How can you use ROI in making wise financial decisions?
- What are the advantages and disadvantages of ROI?
And last but not least, in the text below, you will find out how to use our return on investment calculator to make your calculations (and thus financial decisions) even faster and smarter.
What is ROI?
First of all, you need to know that ROI is an abbreviation of Return of Investment. By definition, ROI is a ratio between the net gains and net costs of the investment. In other words, ROI compares the net income from the investment to the net expenses made to finance this investment. Customarily ROI is presented in the form of percentage points. Thus, when the result of calculations says that
ROI = 0.1, the financial analysts report it as the
ROI = 10%.
Alongside other simple measures of profitability (NPV, IRR, payback period), ROI is one of the most frequently used methods of evaluating the economic consequences of investments. Undoubtedly, its main advantage is its simplicity – ROI can be easily applied to measure investment profitability, as it bases on effortlessly available data and its value is clear to understand and interpret. Moreover, as ROI is calculated in percentage, it's easy to compare the results of many different investments. Consequently, thanks to ROI, you are able to choose the most beneficial one.
Before we move on and discuss ROI in greater details, it is worth to mention that in finance, several different measures may be called return on investment. For example, you can say ROI when referring to measures also known as Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity or Earnings per Share. However, the best known and probably most commonly used is a measure known as simple return of investment, henceforth referred to as a return of investment (ROI).
By the way, it is worth to mention that due to the terminology confusion, when you use ROI measure in the real-life decisions, it is a good idea to precisely know how it has been computed. We also believe that this is one more reason to read our article carefully from top to bottom.
Investors can't estimate the efficiency of their investments without understanding how to calculate ROI. That's why the ROI formula plays a crucial role in investment decisions.
The ROI formula is based on two pieces of information - the gain from investment and the cost of investment. The equation that allows calculating ROI is as follows:
ROI = ( G – C ) / C
G- gain from investment
C- cost of investment
Note here that the ROI equation doesn't take into consideration any risks associated with the investment. It is one of the biggest limitations of ROI (for more, see the section advantages and disadvantages of ROI).
Examples of ROI calculation
Do you want to understand the ROI equation? Are you curious how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of the 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 troubles with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.
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) = 0.5 = 50%
So the return on your investment in the property from the example is 50%.
As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The expected result of the program is $200,000 growth of profits in each of the following two years. First of all, note that your total gain from this investment is gain in the first year plus gain in the second year.
G = $200,000 + $200,000 = $400,000.
Then you can use the ROI formula:
ROI = ($400,000 – $250,000) / ($250,000) = 0.6 = 60%
The ROI of the marketing program is 60%.
You are an investor in the stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. 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 (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) = ($384) / ($1,900.50) = 0.2021 = 20.21%
The ROI equal to 20.21% means that your investment turned out to be profitable. However, if instead of rising, the price of the company Alpha had plunged, the final results would have been different. Let's assume that the final stock price was $9.14. In this case:
ROI = ($1,371 – $1,900.50) / ($1,900.50) = ($384) / ($1,900.50) = -0.2786 = - 27.86%
This time, the outcome of your investment is far from profitable.
Return on investment calculator
The numbers given in the examples in the previous paragraph are rather uncomplicated for business investments. If we deal with much larger amounts of money or with more complex numbers, it's far more comfortable to use our return on investment calculator. Although ROI calculator bases its calculation on the same formula, the usage of it is much easier and faster. With our tool, it's enough only to type the invested amount and the returned amount to get your estimated ROI.
Return on investment calculator is a tool for everyone who has got a business or is planning to set one up. This is also highly recommended for any investors, from shopkeepers to stockbrokers.
Are you curious how to use our return on investment calculator? Obtaining the value of ROI with our smart return on investment calculator is easier than you thought. To assess the profitability of your investment within a few seconds, you don't need to memorize the ROI formula or perform any computations. All you need to do is to fill the appropriate fields in our calculator:
- invested amount – the amount of money you are going to invest (or you have already invested)
- returned amount – the total amount of money you are planning to receive (or you have already received) after the closing of the investment.
That's it! In a trice, our return on investment calculator makes all necessary computations and gives the results. They are shown in a field ROI where you could see the value of ROI in percentage. Did you know that you can also use the return on investment calculator the other way round? Plug in the initial principal (invested amount) and the percentage of estimated profit (ROI) to find out what amount of money you can expect to earn.
In conclusion, ROI calculator can help you make the most beneficial decision. With this application, you can do a cost-benefit analysis in no time. Moreover, with the mobile version of our return on investment calculator you are able to compute ROI whenever and wherever you want.
ROI and financial decisions
Return on investment is a useful measure used to estimate the surplus of net investment benefit on an accrual basis. ROI can also be used in making rational financial decisions. As a simple method, ROI is used primarily as an auxiliary at the initial stage of assessment of the investment project.
In general, the decision criterion is defined in the following way:
- ROI ≥ LV – investment is profitable
- ROI < LV – investment is unprofitable
Where LV is a predefined limit value.
In the simplest case (investor has a capital to invest and has 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 for ROI analysis may be set on a particular level which is different than zero. For example, you can set a return on investment in your branch of industry (ROIb) as a limit value. Then the absolute decision criterion is:
- ROI ≥ ROIb – investment is profitable (acceptable)
- ROI < ROIb – investment is unprofitable (not acceptable)
In the professional application, financial analysts and decision-makers usually use weighted average cost of capital (WACC) as a limit value. In this case, the decision criterion is:
- ROI ≥ WACC – investment is profitable (acceptable)
- ROI < WACC – investment is unprofitable (not acceptable)
ROE vs. ROI
Sometimes return on investment (ROI) is confused with return on equity (ROE). It is worth to briefly discuss the similarities and differences between them.
Firstly, both ROI and ROE are simple methods of absolute evaluation of investment profitability. The characteristic feature of ROI and ROE is that they are single-periods methods, and they do not have the same value for the entire duration of the investment. Moreover, neither ROI nor ROE takes the time value of money into account. In addition, both of these indicators do not include any risk measure.
The main difference between ROI and ROE is that the former takes into account the total expenditure on investments (this is own capital and debt), whereas the formula of the latter includes only own capital.
Advantages and disadvantages of ROI
The main advantages of ROI are as follows:
- Obtaining the value of ROI does not require complicated calculations (especially with our ROI calculator). Contrary, it is simple and easy.
- The results of calculations are easy to interpret and compare with other investments.
- Data necessary to perform calculations are easy to obtain. In fact, you only require two figures to obtain the ROI - gain from investment and cost of investment.
On the other hand, the most notable limitations of ROI are:
The ROI formula does not take into consideration the changes in the value of money over time (formally we say that the ROI disregards the factor of time). This leads to the conclusion that a higher value of ROI does not always mean that one investment option is better than another.
Let's consider two alternative investments with the same ROI of 20%. The investment A last one year, and investment B – four years. You will get the profit from investment A within one year. You need three additional years to get the same gain from investment B. Undoubtedly, despite the same values of ROI, investment A is better than B.
To conclude: If you want to compare two investment options with ROI, you must be sure that ROI calculations are performed over the same time period.
The determination of LV (limit value) is not objective and thus may bias the result of analysis and leads to improper decisions.
Return of investment may be susceptible to manipulation. It is because you can use different approaches to measure gain from investment and cost of investment.
Results obtained from ROI calculations are valid and comparable only if considered gains and costs are related to the undertaken investment, and are not effects of other causes.
Additional information and further calculators
Return on investment is a very popular measure because of its simplicity and usefulness. Now that you know how to calculate ROI, it's high time to find other applications which will help you make the right choices when investing your money. We are sure that the ROI equation is not the only thing you should be familiar with to make smart financial decisions.
- If you are trying to decide what ROI you will get when investing time and money into building a software tool, check out the build vs. buy calculator.
- If you are involved in a trade, you may also need the profit margin calculator, which lets you calculate every variable in the sales process.
- If you want to find your sale price or, inversely, the cost you bear, you should use markup calculator.
- If you need to assess the expected profitability of a planned investment project, try the NPV calculator.
- If you want to estimate how much a particular company is worth, use our discounted cash flow calculator (DCF)
- If you are trying to determine the rate of return on your real estate property purchase, you should check out the cap rate calculator.
- And last but not least, if you want to know how long you have to save to make your dream comes true, use our dream come true calculator.