In choosing investments and projects to consider, aside from the strategies and priorities that need to look out for, the so-called Return-of-Investment (ROI) is another factor that needs to study and should include in making decisions. And unfortunately, people struggle to know and learn its dynamics, also failing to explore the potentials ROI can give convenience to them. Failing to learn about this tool will create more confusions as if is this should even be considered, or if it is used appropriately or incorrectly.
This article will provide some basic knowledge about this tool, aiming to help potential users to make out of it without additional stresses and uncertainties.
What is ROI?
Popularly known as return of investment, it is a financial meter that is used to assess and see an investment’s profitability. By this it means how much income can be generated from a certain venture.
Generally, ROI is the ratio of the net income from an investment which is turned into the percentage from the total investment expenses.
Why is ROI Essential?
In a society where “money talks”, learning ROI has been mostly used by people and even organizations before spending their hard-earned money for further investments with the hopes that they can get better yield from doing it.
Knowing the subtleties of ROI is a good way to evaluate the extent of the net income that can be gained to a particular investment. Furthermore, it also helps a person to compare and be assured of a higher potential financial gain from a certain venture.
Whether launching a new project or selling a property, ROI has been an important criterion in ensuring that people will get positive results in considering to take their risks from it. This has also been another determinant of an investment’s success if it is able to prove that it can give better ROI to its potential investors.
What are the Factors that make ROI popular?
Knowing ROI is already been a needed factor in any business, and the visible it can be seen, the higher the chances that a particular venture will be considered by potential investors. Along with this, there are other attracting benefits of using this method:
- ROI is not a technical and hard-to-understand financial terminology anymore. In fact, people who can be able to present it also provides a clearer definition and language of what a particular is about and how can it benefit its stockholders.
- Compared to other methods, ROI calculation is applicable to any type of investment, making it very flexible. As long as a venture has a cost, it can surely have a guaranteed net income.
- Since the general idea of ROI is that if a negative ROI means an investor loses money and a positive one means gaining more, people think that it is that simple, however, knowing ROI is more than just positive and negative matters on the investment.
- ROI also serves as benchmarks in determining how well the investor’s venture is doing. With this, it can help the stockholder know what areas of the business must be maintained or improved.
How to Calculate ROI?
Generally speaking, ROI can be calculated as:
ROI = 100% * net income / cost of investment or ROI = 100% * (gain of investment – cost of investment) / cost of investment.
This may look very easy to do, but there are further calculations involved before reaching this formula. That is why there are various ROI models used and furtherly improved to make ROI calculations easier and more accessible to anyone.