How to Calculate a Return on Investment

Return on investment is a technique of computing profits from an investment. If you have invested in the share market then you must know how to calculate a return on investment. It is very easy to calculate a return on investment. The gain is changed into a percentage to make easy and uniform evaluation. The general formula used for it is:

100 * gain / cost

The number found now, is very useful in the comparison of the performance of investments and it is similar to the yield which is paid on non-variable income investments.

Computing a return on investment, which is ROI, is a very simple computation which is used to make good judgments, when analyzing a company. For example, if you are facing problems in making decision on a potential investment, you can compute your estimatEd return on investment which will help in guiding you to make a decision.

The other use of the ROI calculation is to find out the profits or losses on present investments in your ownership. Portfolio stocks are the general example of an asset which is used to compute a return on investment. An investor can compute the return on investment for different assets which includes a franchise, small business, real estate or online real estate in addition to common stocks.

Calculation of return on investment can be done with the help of these simple steps given in this article.

Steps to calculate

  1. Determine the cost of your current or projected investment. For instance, if you have 100 shares of a stock with an average of $ 25 per share, your cost on investment will be $ 2,500. You can also factor in any payment costs or any other fees as closing costs on real estate in this number.
  2. Find out your profit or esteemed profit from selling an asset. It can be used in computing your return on investment. To compute the profit on an investment, you have to take the total sale minus the original cost minus any additional fees. For instance, if you are planning to sell 100 shares of stock given in the earlier step at $ 32 per share, your profit from investment will be:

$ 700 = $ 32 x 100 – $ 2,500

This calculation is done without factoring in any fees or payment for ease in understanding.

  1. You should use the profit or esteemed profit obtained in the second step as the numerator and the denominator should be the cost of investment which was determined in 1st step to compute the return on investment. In context of this example, you should calculate $ 700 / $ 2,500 which is equal to 0.28 or 28 %. A 28 % potential profit on a stock exchange is enough for you to take decision on selling out of the position.
  2. Study your return on investment calculation, which will help you in making learned decisions for assets or potential business exchanges. A 28 % profit from a stock obtained in the prior example is a very good return in the course of a few months. But if this calculation is done for a stock, you have bought 10 years ago then this return will be the average return on investment during the course of 10 years and it is less than 3 % profit which is nominal when compared to the 28% profit.
  3. You should compare the return on investment which you have computed across different types of assets. For instance, you can compute a potential profit on a stock and you can compare it with an investment on online real estate. If you break the data down like this, it will help you examine different business opportunities and you can have the best return possible for your investment.

Tips and warnings

  • Compute the ROI for all the investments made by you to compare the return on a variety of assets.
  • Do not make a decision on investment alone on an esteemed return on investment as you are only using an estimated profit from the investment which may not be exact.

Computing return on investment is quite a tricky process. It takes a number of data and information to be calculated.
I hope this article would have proved helpful for knowing how to calculate return on investment.

Related Content:

  1. How to Calculate Return on Equity
  2. How to Calculate Total Returns
  3. How to Calculate Profit Margin
  4. How to Calculate Dividend Yield
  5. How to Calculate Cost of Capital

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