Return on investment or ROI refers to how money can be received from investments. It is represented as a ratio of money earned or suffered as a loss in an investment in association to the invested amount of money. The money, which is earned, is known as profit, interest, net income or gain. The money lost is known as loss.
The return on investment (ROI) is normally expressed as a percentage. The amount of money that is invested is termed as capital, asset or principal. Return can either be positive or negative, which means return can either mean a profit or loss. Return on investment can be calculated on previous or present investment and it is also applied for calculating the estimated rate of return of future investment.
The Return on Investment Formula (ROI):
Return on investment (ROI) is frequently used on an annualized or yearly basis. Return on investment is implemented for the comparison between the returns, which are expected to yield on investments, if the comparison cannot be performed conveniently with the help of monetary values. Return on investment is also known in a number of names, for example the rate of return (ROR), rate of profit or simply return.
The ROI measures the ability of a particular company to utilize its assets for the purpose of generation of extra value for the shareholders. ROI is estimated as Net Profit/Net Worth.
This valuation method is frequently used in accounting processes.
The return on investment ROI can be improved in the following ways:
- By decreasing expenses
- By increasing profits
- By speeding growth
The different formulas for calculating the ROI are the following:
Return on investment is equal to gain from investment minus cost of investment divided by cost of investment. In this case, the cost of investment is deducted from the gain from investment and then it is divided by the cost of investment. The result is represented as a ratio or percentage.
ROI= Net Income/Book Value of Assets
Or, ROI= Net Income + Interest (1-Tax Rate)/Book Value of Assets
Return on investment or ROI is a highly popular measurement due to its convenience.
The factors on which the ROI depends for its amplification are the following:
- The term of the project (the bigger, the more the increase)
- The rate of depreciation
- Capitalization policy
- The time lag between the disbursement of money and the recovery of money (the more the time lag, the more the increase)
- The rate of appreciation of investment
Last Updated on : 5th Oct 2016