![]() ![]() ![]() This time, the outcome of your investment is far from profitable. Let's assume that the final stock price was $9.14. However, if instead of rising, lets see what would happen if the price of Alpha had plunged. 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. In January, you bought 150 shares of the company Alpha. ![]() The result of this program is a $200,000 growth in profits over each of the following two years.įirst 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 the return on your investment for the property is 50%.Īs a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. To calculate return on investment, you should use the ROI formula: Three years later, you sell this property for $900,000. You will also be capable of making smart financial decisions on the basis of ROI metrics.Īs an investor in the real estate market, you purchase a property in New York for $600,000. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. We have prepared a few examples to help you find answers to these questions. We also believe that this is one more reason to read our article carefully from top to bottom.ĭo 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? However, the best known and probably the most commonly used is a measure known as simple return of investment, henceforth referred to as return of investment (ROI).īy 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 know precisely how it has been computed. ![]() For example, you can say ROI when referring to Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity or Earnings per Share. Consequently, you are able to choose the most beneficial one, all thanks to ROI.īefore we move on and discuss ROI in greater detail, it is worth to mention that in finance, several different measures may be called return on investment. Moreover, as ROI is calculated as a percentage, it's easy to compare the results of many different investments. Undoubtedly, its main advantage is its simplicity – ROI can be easily applied to measure investment profitability, as it is based on easily available data and its value is clear to understand and interpret. Thus, when a calculation returns a result of ROI = 0.1, the financial analysts report it as the ROI = 10%.Īlongside other simple measures of profitability (NPV, IRR, payback period), ROI is one of the most frequently used methods of evaluating the economic consequences of an investment. Customarily ROI is presented in the form of percentage points. In other words, ROI compares the net income from an investment to the net expenses required to finance that investment. By definition, ROI is a ratio between the net gain and the net cost of an investment. First of all, you need to know that ROI is an abbreviation of Return of Investment. ![]()
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