Return on Investment (ROI) is a financial metric used to evaluate the profitability or efficiency of an investment. It measures the return generated relative to the cost of the investment. The ROI calculation is straightforward and is typically expressed as a percentage. Here’s the formula to calculate ROI:
ROI = (Net Profit / Cost of Investment) x 100
To calculate ROI, follow these steps:
- Determine the Net Profit: Calculate the net profit generated by the investment. This can be done by subtracting the initial cost of the investment from the total returns or gains realized from the investment. Net profit includes any income, dividends, or capital appreciation.Net Profit = Total Returns – Cost of Investment
- Calculate the ROI: Divide the net profit by the cost of the investment and multiply by 100 to express the result as a percentage.ROI = (Net Profit / Cost of Investment) x 100
For example, let’s say you invested $10,000 in a stock, and after one year, you sold the stock for $12,500. During that year, you received $500 in dividends. To calculate the ROI, you would first calculate the net profit:
Net Profit = ($12,500 + $500) – $10,000 = $3,000
Then, you can calculate the ROI:
ROI = ($3,000 / $10,000) x 100 = 30%
This means that your ROI for the investment was 30%.
ROI is a useful metric for comparing the profitability of different investments or evaluating the performance of an investment over time. However, it’s important to consider other factors, such as the investment’s timeframe, risk, and any associated costs or fees, when assessing the overall attractiveness of an investment.
