Return on Investment Calculator

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A screenshot of a simple ROI Calculator interface. The interface consists of input fields for entering the initial investment, expected return on investment, and time period. A Calculate button is present to perform the calculation. The output, showing the calculated ROI, is displayed prominently below the input fields.

Have you heard the term "return on investment" or "ROI" before when talking about financial decisions? This article explains what ROI represents, how to calculate it, and why it matters.

What is Return On Investment (ROI)?

ROI measures the profitability or potential gains from investing money into some kind of asset. It represents the percentage return generated on dollars spent through profits and appreciation. Tracking ROI informs smart investment choices by quantifying financial performance.

Why ROI Matters

Paying attention to ROI helps:

  • Identify your best investment opportunities
  • Clarify if investment capital is being used efficiently
  • Benchmark against performance of other assets
  • Set objectives for minimum acceptable returns
  • Determine when more cash should be allocated

Seeking high ROI assets boosts overall wealth building.

Calculating ROI

While complex valuations are used professionally, personal ROI equals:

ROI = (Current Value - Original Cost) / Original Cost x 100

For example:

  • Stock purchased for $1000 is now worth $1500
  • Gain is $1500 - $1000 = $500
  • $500 Gain / $1000 Original Cost x 100 = 50% ROI

Use this easy formula to quantify personal investment performance!

Tips for Improving ROI

Actions to aim for higher ROIs:

  • Research historical returns across asset types
  • Focus money into best performing channels
  • Reinvest earnings rather than withdraw capital gains
  • Allow long hold periods for appreciation
  • Diversify across sectors and risk levels
  • Avoid panicked selling during temporary dips

Patience, diversification, and reinvestment enable maximizing portfolio returns.

What is a Good ROI?

While ROI objectives and acceptable thresholds vary by investor, general ROI benchmarks for positive returns are:

  • Savings accounts - 0.5-1.5%
  • S&P 500 - Average 7-10% historically
  • Bonds - 1-4% generally
  • Real estate - 6-12% depending on type
  • Small businesses - 10-20% in healthy economies

So while ROI expectations differ by asset class, total portfolio returns averaging 8-12% are strong over decades. Critical factors aside from ROI percentages that also determine "good" investments include risk management, liquidity, diversification, and personal goals. Assess ROI numbers in the fuller context.

Return on Investment (ROI) Ratio Formula

The most common equation used to calculate ROI percentage is:

ROI = (Current Value - Original Cost) / Original Cost x 100

Breaking this formula down:

  • Current Value - What the investment is worth presently
  • Original Cost - What was originally paid for the investment?
  • Gain/Loss - The change in valuation between current value and original cost
  • ROI Ratio - Divides the total gain/loss by original cost, expressed as a percentage

Plugging real numbers into this formula allows an ROI computation. For example:

  • $10,000 current value
  • $8,000 original cost
  • $10,000 - $8,000 = $2,000 gain
  • $2,000 / $8,000 x 100 = 25% ROI

Tracking this ratio annually quantifies investment profitability over time.

Frequently Asked Questions (FAQs)

Q1: What is ROI?

ROI stands for Return On Investment. It is a performance measure used to evaluate the efficiency or profitability of an investment relative to its cost.

Q2: How is ROI calculated?

ROI is calculated by dividing the net profit or gain from an investment by the initial cost of the investment and expressing it as a percentage. The formula for ROI is: (Net Profit / Cost of Investment) x 100.

Q3: Why is ROI important?

ROI is important because it helps assess the success or failure of an investment. It allows investors, businesses, and individuals to evaluate the profitability and efficiency of different investment options.

Conclusion

Calculating return on investment informs how efficiently capital is being deployed towards profitability and asset appreciation. Compare ROI across asset classes and over multi-year periods to identify optimal wealth-building opportunities. 

 

Read More: What Is ROI? How to Calculate Return on Investment

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