Do 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?
We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.
Example 1
As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000.
To calculate return on investment, you should use the ROI formula:
ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%
So the return on your investment for the property is 50%.
Example 2
As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years.
First 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: G = $200,000 + $200,000 = $400,000.
Then, you can use the ROI formula:
ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%
The ROI of the marketing program is 60%.
Example 3
You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. The total value of the transaction was then: 150 x $12.67 = $1,900.50. After nine months, thanks to the favorable economic conditions, the stock price rose to $15.23, and you decided to sell them (the value of the transaction was: $15.23 × 150 = $2,284.50.
The ROI of this investment is:
ROI = ($2,284.50 – $1,900.50) / ($1,900.50) × 100%= ($384) / ($1,900.50) × 100% = 0.2021 × 100% = 20.21%
A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, let's see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:
ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%
This time, the outcome of your investment is far from profitable.
FAQs
The problem is that these calculators are generally pretty simple and don't account for a lot of complex variables that are involved in figuring out a proper Return on Investment. If there's only five or six inputs, you're not likely to get an accurate model of your costs.
How do you calculate the ROI amount? ›
You may calculate the return on investment using the formula: ROI = Net Profit / Cost of the investment * 100 If you are an investor, the ROI shows you the profitability of your investments.
What is the correct formula for calculating ROI? ›
Key Takeaways
Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
How do you calculate ROI score? ›
Return on investment (ROI) is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100% when expressed as a percentage.
Are investment calculators accurate? ›
The output is only as accurate as the assumptions used for input. One mistaken assumption, and your retirement needs could easily be twice the amount estimated (or worse), leaving you financially exposed when you can least afford it.
What is a realistic ROI? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%.
How do you calculate real ROI? ›
Return on investment (ROI) measures how much money, or profit, is made on an investment as a percentage of the cost of that investment. To calculate the percentage ROI for a cash purchase, take the net profit or net gain on the investment and divide it by the original cost.
What is a good ROI for a business? ›
Common multiples for most small businesses are two to four times SDE. This equates to a 25% to 50% ROI. Common multiples for mid-sized businesses are three to six times EBITDA. This equates to a 16.6% to 33% ROI.
How to calculate annualized ROI? ›
Example of calculating annualized return
To calculate the total return rate (which is needed to calculate the annualized return), the investor will perform the following formula: (ending value - beginning value) / beginning value, or (5000 - 2000) / 2000 = 1.5. This gives the investor a total return rate of 1.5.
What is ROI for beginners? ›
ROI is a calculation of the monetary value of an investment versus its cost. The ROI formula is: (profit minus cost) / cost. If you made $10,000 from a $1,000 effort, your return on investment (ROI) would be 0.9, or 90%. This can be also usually obtained through an investment calculator.
There must be two values that are known to calculate the rate of return; the current value of the investment and the original value. To calculate the rate of return subtract the original value from the current value, divide the difference by the original value, then multiply by 100.
How do you calculate ROI in Excel? ›
Calculating ROI is simple, both on paper and in Excel. In Excel, you enter how much the investment made or lost and its initial cost in separate cells, then, in another cell, ask Excel to divide the two figures (=cellname/cellname) and give you a percentage.
What is an example of ROI? ›
Consider someone who invested $90 into a business venture and spent an additional $10 researching the venture. The investor's total cost is $100. If the venture generated $300 in revenue but had $100 in personnel and regulatory costs, then net profits would be $200. ROI is $200 divided by $100 for a quotient of 2.
What is the rule of thumb for ROI? ›
The rule of thumb for marketing ROI is typically a 5:1 ratio, with exceptional ROI being considered at around a 10:1 ratio. Anything below a 2:1 ratio is considered not profitable, as the costs to produce and distribute goods/services often mean organizations will break even with their spend and returns.
How do you calculate ROI content? ›
In a nutshell, content marketing ROI is a percentage showing how much revenue you gained from content marketing in comparison to what you spent. In other words: (Return - Investment ÷ Investment) x 100 = ROI.
Is ROI a good measure? ›
Measuring ROI helps you to identify when to pivot your marketing efforts and what impact your marketing is having overall. Calculating the ROI for your efforts might be a challenge, but once you put some quick metrics in place, it is well worth it.
What is the benefit of ROI calculator? ›
ROI calculators visualize the return on investment a buyer can expect from a purchase or investment based on a variety of factors such as the increase in sales, efficiency or cost savings. Thereby, they help sellers communicate the specific business impact of the solution for their buyers' business.
How good is a 20% ROI? ›
There is no set percentage. Some agencies might be satisfied with a 5-percent ROI, while others might be on the lookout for a higher number like 20 percent for it to be considered good ROI.
Is 80% ROI good? ›
Return on Investment (ROI)
This calculation works for any period, but there is a risk in evaluating long-term investment returns with ROI. That's because an ROI of 80% sounds impressive for a five-year investment but less impressive for a 35-year investment.
