# ROI Calculator

ROI is an acronym for Return On Investment so the ROI Calculator is a Return on Investment Calculator. The ROI Calculator allows you to calculate the ROI ratio in order to evaluate the efficiency of an investment, you can also use the ROI calculate to compare the efficiency of several different investments. In addition to the free online ROI Calculator, we provide a detailed guide to ROI which explores the relative merits of ROI, discusses how to calculate ROI and details the formulas which can be used to calculate ROI and ROI ratios. The ROI is provided as a percentage and a ROI Ratio.

 🖹 Normal View 🗖 Full Page View Amount Invested Amount Returned
 Return on Investment: ROI Ratio:

## What is ROI?

ROI (Return On Investment), like most financial measurements, is a ratio which defines the relationship between the cost of an investment and the net profit of the investment. In order to leverage ROI effectively, you need to understand why ROI is important, how ROI is calculated and what the ROI ratio means for investment decision making. Let's review each of these key questions in turn:

## Why ROI is important?

ROI is incredibly useful as it provides a quantifiable ratio that support both business decision making (when considering business strategy and setting KPIs) and helps investors define expectation of returns before committing to an investment. Put simply, ROI allows us to understand exactly what we can expect to get for our money. It is important to understand that ROI can be a guaranteed figure or a target figure. ROI is typically guaranteed on a unit basis when measuring the relative cost and sale price of a product or service where as ROI on share investments is typically a target on higher risk investments and not always guaranteed on low risk investments. ROI can also be used on a practical level in everyday life, consider the money you put into a savings account with you bank. Bank savings accounts normally attract interest, so, you can expect a return on your investment. That principal of reviewing something back for what you invest is exactly the same whether it is an investment in property, shares, business development, stock or human resource.

When we understand the ROI, it helps us to make an informed decision about how we use our money to work for us, for example:

• A business that needs to increase the sales process could invest in new online sales software that provides great automation and stock control. Implementing that new software solution will require an investment in the software, creating new business processes, training staff, marketing the advantages of the new solution to increase sales and so forth. The cost of that investment can then be measured against the increased revenue from higher input, the offset of increased staffing costs and the reduced time spent on manual stocktaking.
• A business that provides pick and pack services could measure the ROI of a new employee based on the amount of units completed per hour, day, week, month, year etc. Thereby quantifying the return based on investing in human resource.
• A website owner wants to increase traffic to their website. In order to do this, they invest in social media campaigns, Google Adwords Campaigns and SEO using a Hoth X strategy. They measure their ROI by comparing the cost of their increased visibility and leads campaigns against new traffic which results in new leads, direct sales of a product or by increase in their online advertising revenue. A separate ROI could be produced for each of these solutions and/or a total ROI calculation provided as part of a strategic campaign for website growth.

As our ROI examples illustrate, ROI is not just about shares, ROI is a ratio that can be used to measure every investment that expects to provide a return. An investment that doesn't provide a return is a donation. Any transfer of money or assets that provides something in return, be 2wit financial or an action, has a quantifiable ROI ratio.

## How do I calculate the ROI ratio?

There are three clear means of calculating ROI, the ROI Calculator allows you to choose which ROI calculation method you prefer to suit your needs:

### ROI Formula Method 1

Method 1 is normally see for measuring market performance when investing in shares.

ROI = Net Income / Investment

Where:

• Net Income = Gross Profit - Associated Expenses
• Investment = Stock + Shares Outstanding + Claims

### ROI Formula Method 2

Method 2 is typical for investment directly in a company or specific opportunity where the return is not measured against specifics goods or quantifiable repeat service.

ROI = (gain from investment - cost of investment) / cost of investment

### ROI Formula Method 3

Method 3 for calculating ROI is typically used when the ROI is linked to specific goods and/or a service. This can be useful for scaling up/down an investment on a product/service delivery approach and associating ROI for changing environment (sales, peak sale price factoring demand etc.).

ROI = (revenue - cost of goods sold) / cost of goods sold

## How does ROI support effective investment decision making?

ROI is a key decision metric for investment planning as it allows us to identify what the outcome of our investment could be based on the amount of funds invested. When looking to make an investment, we will encounter two scenarios, the first are investments with a High ROI, the second are investments with a Low ROI, let's first see what each of those means to investors:

• High ROI: The investments net profit compares very well to the investment cost, or, in simple terms, a high ROI indicates a good investment.
• Low ROI: The investments net profit compares poorly to the investment cost, or, in simple terms, a low ROI indicates a poor investment.

Excellent, so now you are armed with the knowledge that, when making a financial decision about your investment, you always want to have a high ROI, so, you always choose the high ROI option Well, if only investment planning was as easy as that. Before making any form of investment, particularly large investments, it is important to understand the ROI but the "return on investment" is typically balanced against the "risk of investment". This is not necessarily always the case but, in the majority of investments, the rule of thumb is:

• High ROI = High Risk: The higher the risk, the more likely you are to lose the investment or not see the full return (partial success etc.), you may even lose part/all of you initial investment.
• Low ROI = Low Risk: The lower the risk, the more likely you are to achieve the ROI stated and achieve the expected return. Low risk investment with low ROI typically guarantee your initial investment (though not always, check the small print and full financial agreement before you invest).

A simple way of visualising the relationship between ROI (Return on Investment) and IR (Investment Risk) is a seesaw. Put simply, as ROI increases, IR decreases and vice-versa. This is a very simple "investment seesaw".

So why bother with high risk investments? A successful investment strategy is based on detailed and informed financial risk assessment. It is key that the investment strategy mirrors the individual investor or group of investors investments goals and caveats. It is completely normal for us all to desire a high ROI on our investments and achieving a high ROI is feasible, it simple comes down to how risk averse we are and how investment savvy we are. Certain high risk investment portfolios may terrify those new to investment management while other investors may downgrade the risk based on their own experience. For those new to investing who really don't understand the scope of the risk analysis or the complete risk of the portfolio they are investing in, it is worth pausing and considering what you are personally prepared to lose. If the answer is "I don't want to lose the money I have" then you are best looking for secure low ROI investments. If you are not afraid of losing the investment, high ROI investments are for you, but you need to do your research. The truth is that most investors has an element of the desire for security and high ROI, the result is an investment portfolio that offsets "Risk versus Return" by splitting the investment fund and investing a percentage in low risk low return portfolios and the remaining percentage in high risk high return portfolios. The investment fund percentage split being defined by the individual or groups assessment being determine by the financial factors we covered above. If we think of our "investment seesaw", most investors will lean towards a balance where risk and return are equal in their perspective.

## Summary

We have covered the relative merits of ROI and looked at how the ROI ratio can be used to ascertain the return on investment and how it is important to weigh the ROI against the IR (Investment Risk). We have also reviewed three separate formulas for calculating ROI manually. Earth of these methods is included within the ROI calculator which allows you to calculate ROI online before making an investment and on maturity of the investment to compare forecast ROI versus actual ROI. Most importantly, we have underlined that ROI is just one factor that should be used as part of an effective investment portfolio and that investment risk must always be carefully understood and considered before deciding and commitment to invest your money.