When you make a business investment, you deserve a reasonable return, or “incremental revenue”, a percentage that is significantly greater than the amount of your upfront investment.
Isn’t that the simplest math? But here’s the thing, return on investment (ROI) can have both positive and negative aspects. Moreover, the ROI is a metric of the return yield of the amount of investment, not the time value of money or the return depending on the investment’s hold duration. So how would you calculate annualised returns or connect them to the CAGR and compounded annual growth rate? You need to consider all these things in your calculations.
MPVD & Associates, a reputable CA firm in Kolkata, has assisted hundreds of firms and entrepreneurs in determining their investment and return ratios. We intend to explain the ROI calculation in this article to help the general public get started. We have provided crucial examples for calculating ROI and comprehending the formula for effective investments.
What Is Return on Investment?
The profits and losses connected with a specific investment are referred to as the return on investment (ROI). Using the gathered ROI, businesses and individuals may cross-check their portfolios to see which investments worked well for them and which ended up being the incorrect option.
ROIs’ purpose is to illustrate to investors how successful their investments have been. This enables them to evaluate their portfolio of investments and become knowledgeable enough to make future investment selections. Furthermore, these allow companies to justify any extra expenses incurred to achieve their overall goals and objectives.
An Overview of the ROI Formula
Divide the amount you received from an investment—often referred to as an initial value investment or INI—minus its current value by the cost of the investment. Finally, to calculate the return on investment, multiply the value by 100. Use percentages to show the outcome. The following ways you can represent this formula:
ROI = (Net Profit / Cost of Investment) x 100
ROI = (Current Value – Initial Value / Cost of Investment) x 100
Consider a scenario where you invested INR 2,000 in a firm last year and this week sold your shares for INR 2,200. Then, how would you calculate the investment’s return on investment?
ROI = (2,200 – INR 2,000 / INR 2,000) x 100
10% would be your ROI (Return on Investment). Include capital gains taxes and other fees connected with acquiring or selling the shares within the cost of the investment for a more accurate assessment.
Things to Consider When Calculating ROI
Consider the following key factors when calculating ROI (Return on Investment):
- Identify the initial investment cost, including all expenses involved.
- Determine the net profit or benefits generated by the investment over a specific period.
- Consider both tangible gains, such as increased revenue or cost savings, and intangible benefits, like brand reputation.
- The timeframe is crucial; ensure consistency when comparing different projects or investments.
- Keep in mind that factor in potential risks and uncertainties that may affect the outcome.
- Finally, use a clear formula to calculate ROI. Divide the total profit by the cost of the investment. Express the result as a percentage to evaluate the investment’s effectiveness.
Maximise Your ROI with MPVP & Associates!
Contact MPVP & Associates, the leading CA firm in Kolkata, to learn more about return on investment (ROI). Our skilled staff have the knowledge and skills required to grasp and enhance your return on investment (ROI). We can help you make data-driven decisions and increase the financial performance of your organisation. Contact us and boost your ROI with our specialised services.