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What is ROI (Return On Investment)?

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Return on investment or ROI is a remarkable term that can be used by entrepreneurs to track their company’s profits and losses. It tends to be more useful when coupled with other terms and models like the business case equation or the Fermi model because without them an ROI calculation becomes incredibly difficult in certain situations such as large investments being used for unknown concepts that are difficult to determine prior to full execution. Because of this, we recommend using these formulas as part of your business plan as you set out to launch your company and begin attracting new investors!

Let’s take a closer look. In this article, we will cover the following topics.

  • What is ROI (Return On Investment)?
  • How is ROI Calculated?
  • ROI Example
  • Understanding ROI

What is ROI (Return On Investment)?

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

ROI attempts to directly measure the amount of return on a given investment relative to the cost of the investment.

Learning how to calculate ROI, why it’s important, and the challenges you may encounter while trying to determine ROI is important so you can make the right investments.

How is ROI Calculated?

To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or ratio.

ROI = (Present Value of Investment – ​​Cost of Investment) / Cost of Investment

Present Value of Investment refers to the proceeds from the sale of that investment.

Because ROI is measured as a percentage, it is easily comparable to returns from other investments, allowing various types of investments to be measured against it.

ROI Example

Let’s say a home owner is considering renovating his home to add a pool.

The house is currently valued at £500,000 and the renovation will cost £100,000, but this development is expected to increase the value of the house by £250,000.

In this case, the ROI would be:

ROI = (250,000-100,000) / 100,000

ROI = 150% will be output. This indicates that the investment is profitable.

If you are looking for an online calculator, you can use the link below.
ROI Calculator

Understanding ROI

ROI is a popular metric because of its versatility and simplicity.

Essentially, ROI can be used as a key indicator of the profitability of an investment. The ROI on an equity investment can be the ROI a company expects to expand a factory, or the ROI generated in a real estate transaction.

If an investment ‘s ROI is net positive, it is likely to be beneficial. Likewise, investors avoid negative ROIs , which mean a net loss.

As a result 

If you want to make an investment, you should definitely look at its ROI . This helps you to understand the investment correctly and make more profitable decisions.

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