One of the most common investment calculators in existence is the ROI calculator. It is a powerful tool that lets one calculate their loss or profit from an investment. Return on Investment is essentially a performance measure utilized to estimate the efficiency of a given investment, and as a byproduct, it can be used to compare several investments. Once you calculate ROI, you can make better decisions, since some investments can be deceptive in terms of their potential return. The rest of this article will cover the following topics: ● Return On Investment (ROI) ● The formula for ROI ● Calculating ROI ● The differences between ROI and ROE? ● Improving financial decisions with ROI ● Advantages and disadvantages of ROI Once you understand these topics, you will be ready to use the Return On Investment calculator for your personal and business decisions. The tool will improve your efficiency and simplify your calculations, which will save you time and money in the long run.
ROI is a ratio between the amount of return from an investment and that investment’s cost. In simple terms, the ROI compares the net income of a particular investment and the net expenses needed to fund the investment. It is customary in finance to express ROI as a percentage point. Meaning that if one works-out ROI and gets 0.3, you should convert it to 30% (keeping in mind that 0.3 = 30%). Payback period, NPV and IRR are examples of profitability measures that are used in tandem with ROI. Even so, ROI is still the most frequently used calculation when one wants to ascertain the economic viability of a given investment. The measure is popular due to its simplicity. Its inputs are comprised of readily available data, and its output value is not only easy to calculate from the inputs but is relatively straight forward and easy to interpret. Therefore, when comparing two or more investments for profitability, one only need look at the percentage values of the ROI. Therefore, the measure becomes a useful tool when one is making a quick decision between investments or one has limited information with regards to several investments. In finance, many measures are referred to as return on investment. Therefore, it is important before we go any further with ROI that we have a look at some of these measures. Return on Equity, Earnings per Share, Average Rate of Return, and Return on Invested Capital (ROIC) are all examples of other values that can be referred to as ROI in finance. The most popular measure and most commonly used is simple return of investment. This is the specific measure is what we are referring to in this article when we say ROI. This distinction is crucial for the reading and understanding of this article since this mix up of terminology can happen pretty easily. Hence it is imperative that when you use ROI to make decisions, you understand how that particular ROI is calculated.
Before an investor can ascertain the efficiency and profitability of their investment, it is paramount that they understand how to calculate and interpret ROI. As such, the formula for ROI is essential for someone looking to make an investment decision. The ROI formula has two variables. The first variable is the amount gained from the investment and the second variable is the cost of that investment. See the formula for ROI below: ROI = (G - C)/C Where: ● G stands for the amount gained from the investment ● C stands for the cost of that investment Note that the simplicity of the equation is such that it doesn't account for any risks associated with the investment. In practical application this can be dangerous if not considered. Please refer to our section on the advantages and disadvantages of ROI for further information.
Maybe you want to understand the ROI formula, learn how to calculate the ROI in practice or interpret the ROI value. Here is a set of examples that will help you understand, calculate and interpret the ROI value. It is vital to fully understand these examples, since your understanding of the ROI measure will help you use the calculator effectively. As such, we have prepared three different examples to cover the basic variations involved with these calculations. These will help you use ROI metrics correctly when investing. Example 1 Imagine you are an investor in the cryptocurrency market, you purchase $200,000 worth of bitcoin. Two years later, the bitcoin you own is now worth $650,000. Using the ROI formula to see the return on your investment: ROI= ($650,000 - $200,000)/($200,000) = 2.25 = 225% Therefore, the return on your cryptocurrency investment is 225% Example 2 As the Head manager of a large European football club, you buy a highly touted youth from Barcelona for $800,000. Over the next three seasons, his value increases by $300,000 each season. It is essential to note that the total gain from this investment is the Gain of the individual seasons added up. Hence: G = $300,000 + $300,000 + $300,000 = $900,000 Using the ROI formula to see your return on investment: ROI = ($900,00 - $800,000)/ ($800,000) = 0.125 = 12.5% Therefore the return on investment is 12.5% Example 3 You are looking to make money in forex trading. In February, you buy South African Rands using $700 US dollars. The rate at the time is $1.00 = R 15.00. The total value of the Rands you have bought is: 700 * R15 = R10,500.00. After a year, due to the economic stability you anticipated in South Africa, the Rand strengthens, and the exchange rate is now $1.00 = R13.50. So, looking to capitalize you sell the Rands. The value of the transaction was: R10,500.00/R13.50 = $777.78 Using the ROI formula to see your return on investment: ROI = ($777.78 - $700)/ ($700) = ($77.78)/($700) = 0.1111 = 11.11% A return on investment of 11.11% shows that it was a good investment that turned out profitable. Now, let us look at a situation where the economy of South Africa had been unstable, with the Rand weakening instead of strengthening. Let’s how your investment would have turned out according to the ROI formula. Now let’s say the exchange rate had been $1.00 = R18.00 after a year. In this case: Value of the transaction would be: R10,500.00/R18.00 = $583.33 Using the ROI formula to see your return on investment: ROI = ($583.33 - $700)/($700) = ($-116.67)/($700) = -0.1667 = -16.67% As you can see, this is a loss and is nowhere near profitable.
The situations and numerical figures used in the examples above are relatively simple and straightforward. In real life, things tend to be far more complex. When dealing with more significant and complicated statistics, it can be challenging to use the ROI formula without making mistakes. The ROI calculator simplifies this and reduces the chances for error by letting you do the bare minimum of entering the figures and getting output. Yes, the ROI calculator uses the same ROI formula we have shown; it just makes things faster and more straight forward. If you are investing or running a business, this tool is one that will increase your financial intelligence but providing you with a fast and reliable way to calculate ROI when you have the most basic of figures in mind. Whether you own a small convenience store or are trading cryptocurrency, potential ROI is something you need to always have in mind. Now on how to use the ROI calculator. Obtaining the ROI using our calculator is very simple. Gone are the days of computations whether by hand or traditional calculator. There is no need to memorize the ROI formula and risk making mistakes that can negatively affect your investments. As long as you have any two values from the following three: the Invested amount, the returned amount or the ROI, then the calculator will do the rest. ● The invested amount - is the money you will allot to the particular investment. ● The returned amount - is the money you will receive from the particular investment. ● ROI - is the return on investment as a percentage Simply input two of these values and the calculator will output the results. If you know the ROI of a given investment from reliable past data, you can enter that and your budget and see the amount you expect to receive. This can be used to set target goals so that you know what mark you’ll need to hit to have an ROI at a certain level. This knowledge can help when dealing with clients who may not be familiar with the business and rely on straightforward figures such as the ROI to judge the success of an investment. In closing, the ROI calculator is a useful tool that we have automated and simplified. Now running a cost-benefit analysis will be a walk in the park. It is also available on mobile, which allows you to check ROI on the go no matter where you are.
In actuarial science, one may want to approximate the surplus of the net investment benefit, and the ROI is commonly used to make this approximation. In simple terms, if you're going to do the financially sensible thing, you must use tools like ROI, as they are not affected by emotions. ROI is not the only measure or consideration one must take when investing. There are many others, but ROI is essentially the first line of defense. In short,ROI is just the first stage of assessing an investment. There is a decision rule when interpreting the ROI value: ● ROI > LV - then it is a profitable investment ● ROI < LV - then it is an unprofitable investment ● ROI = LV - then it is a break-even investment Noted: LV is the limit value (predefined) But the decision rule changes when there is capital and only one investment alternative: ● ROI > 0 - then it is a profitable investment ● ROI < 0 then it is an unprofitable investment ● ROI = 0 then it is a break-even investment Unlike the simple example above, the limit value (LV) is not always zero. If you were to set the LV in your branch of industry, the LV will be defined as ROIb. The decision rule becomes: ● ROI > ROIb - then it is a profitable investment ● ROI < ROBb then it is an unprofitable investment ● ROI = 0 then it is a break-even investment Financial analysts in the industry tend to use the weighted average cost of capital (WACC) as the LV.
It is a common mistake mixing up the return on investment (ROI) with the return on equity (ROE). Consequently, we will take a closer look to assess why this is so common. Both ROI and ROE are single-period measures of investment profitability. They don’t take the time value of money into account when returning values. Neither of them measures the risk of a particular investment. Where they differ mainly is ROI considers the total used for investing while ROE only considers capital.
Advantages of using ROI ● It is a simple formula to use (especially if one uses the ROI calculator). ● The output as a percentage is easy to interpret, making it very easy to compare with other investments regardless of sector or field. ● It is fairly easy to obtain the required data as one only needs two of the three inputs to get an output. Disadvantages of using ROI ● It doesn’t account for the time value of money. $500 today is worth more than $500 tomorrow due to inflation. Therefore, when you get the ROI of two different investments and the, it is important to keep their respective time periods in mind. Let's look at an example where you have two investments with the same ROI of 25%. Now if the first one is over two years while the second one is over five years, it is clear that the first one is the better investment even though the ROIs are the same. ● Someone presenting an investment to you can manipulate the ROI, since things like “gain from investment” can be arbitrary, especially when factors like increased brand recognition from advertisements can be factored in. ● The ROI value from the ROI calculator is only valid when the cost and gain of the given investment are related to the investment itself and not outside factors.
Return on investment is a prevalent measure because it is simple and yet still very useful. However, this measure is only an initial assessment tool for an investment, so it is important to familiarize yourself with the other measures used to ascertain profitability. Here is a breakdown for a few of the other calculators that one should make sure they know before investing their hard-earned money. ● Build vs. Buy calculator - used when you want to know the ROI if you invest time and money into building your own software tool as opposed to buying an already made one. ● CAGR calculator - if you are looking to approximate the average yearly profit from a given investment. ● Profit Margin Calculator - for investments that deal with trade, so you can work out all the variables during a sale. ● Markup calculator - If you want to know what price to sell a certain good or service. ● NPV calculator - checking the profitability of planned, project investment. ● Discounted cash flow calculator (DCF) - If you are looking to approximate the value of a company ● Cap rate calculator - for calculating real estate investment profitability. ● Dream come true calculator - If you have ever had a dream and want to save money to make it come true, then this will let you klnow just how long you have to save to make it come true.