How to Calculate Return on Investment (ROI)
Return on Investment (ROI) is used to measure the return on an invested amount. This indicator is also popularized by the famous Anglo-Saxon ROI: Return on Investment.
Simply enter the word “ROI” on the Internet to understand how commonplace the phrase is.
The principle is to determine the gains made by the operation. It is usually measured as a percentage by the ratio of net gain/investment amount.
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Return on Investment calculation formula
ROI = (Gains – Investment costs) / Investment costs
Net Income = Investment Income – Capital Expenditures
Return on investment is generally noted in percentage, which means that 10% of us gives 10 cents for every dollar of investment. If you want to have the return on investment in percentage then you have to calculate it as follows:
ROI = (Net income / Investment cost) x 100
How to Calculate Return on Invesetment:
For example, if the net income is $ 1,200 and the investment cost is $ 10,000, then the return on investment is 1,200 / 10,000 = .12 or declared as a return on investment percentage is 12%.
If the return on investment is negative, then the investment should not be considered because the investment is a loss. If the return on investment is positive, the investment is profitable. Higher ROI is better than the lower return on investment. A project with the highest return on investment will be the highest rate of profit.
Other measures that money can be used to measure cost and income. This is why the return on investment is very flexible and can be manipulated. Therefore, it is necessary to know how the ROI is calculated, ie what are the costs and what are the revenues? For example, the ROI of the accounting is equal to the net income divided by the total assets. ROI works very well if income and results can be easily identified.
Return on investment can also be used with a less precise definition of income and results. One could consider customer satisfaction, accuracy, buying average boards or something else. For example, one could calculate the return on investment for customer satisfaction (where CS is the abbreviation for customer satisfaction) like this:
ROI = Change in customer satisfaction and investment costs
Variation of customer satisfaction = CS, after investment – CS before investment
What should you do with return on investment? First, if you only have a return on investment can only show if your investment is profitable (ROI> 0). If you have several investments and you are considering ending, you probably have to end the one with the lowest return on investment. Also, if you have several investment opportunities, you should choose the one with the highest return on investment. Of course, you should consider other factors involved, such as risk, the minimum amount needed to invest.
This formula applies to all types of operation. It may be as much a matter of making a choice between several production machines as of estimating the gains of an advertising campaign.
As we have just seen, ROI is used by investors to select one of the several projects. It is also used to measure the profitability of an investment. We find this application frequently in marketing and especially in e-business: ROI of an AdWords campaign, ROI of a lead generation operation … The objective is to determine if the campaign has been profitable and to study the points to improve for better performance. With these examples, we can clearly see the two main functions of the indicator: decision support and performance analysis.
In terms of computation, it appears that the apparent simplicity of the ratio masks shortcuts detrimental to its relevance. Indeed, the calculation of the profit generated can be complicated when taking into account the effects of inflation. And yet for projects with far-reaching profitability, updating the figures is mandatory.
Another disadvantage is a focus on the financial side of the investment. The related benefits are ignored in this ratio: employee motivation, brand image improvement, etc. When one knows today the weight of the intangible in the economy, it is pertinent to add this parameter in its decision-making system.