Return on Investment

ROI, also known as the return on investment, is defined as the measure of evaluating your business performance and efficiency or profitability. ROI is nothing but a performance measure of your company in simple terms. The investment return is a way to directly measure the amount of return your business provides on a specific investment related to the investment cost. This article will discuss the return on investment, its advantages and disadvantages, how you can calculate your return on investment for your company, and how to achieve a higher return on investment.

What is ROI?

Return on investment is defined as the ratio between net income and investment in your company. The sole purpose of return on investment is to measure the rates of return on invested capital in any economic organisation. ROI is calculated to decide a business’s investment-seeking capability and as an indicator or measure to compare several investments in a portfolio. To be an investment-worthy financial institution, you should have a good return on investment as a higher ROI is generally prioritised. 

How to calculate ROI?

Return on investment is generally calculated to judge your investment worthiness. Your business credibility depends on your performance regarding your investors’ returns. This ROI can be calculated in several ways, totally depending on the application and goal of ROI calculation. The most straightforward and most frequently used formula to calculate your organisation’s ROI is :

ROI (in %) = Net Profit / Cost of Investment x 100

                                             or

(current value of investment or sold price of an investment, if not excited and not excited respectively + total income generated from the investment – initial phase investment with other expenses) / initial phase investment with other expenses × 100 

Let’s understand with an example.

Suppose you bought a stock for 100 USD and in addition to it you also paid 5 USD as Commission. Then after a year, you as an investor received 4 USD as a dividend, and you sold this share at 200 USD with again 5 USD as Commission. 

Now, what will be your ROI?

Let’s calculate your actual ROI

ROI= (200+4-100-5-5)/(100+5+5) × 100 %

This shows that your actual return on investment is 85.45%

This is considered an effective and good ROI.

Advantages of a better ROI?

We made you familiar with the ROI formula, and now let’s see some of the advantages and disadvantages of ROI.

Advantages

• A better way to measure a business’ profitability

• Goal Congruence 

• Enhanced comparative analysis

• It is a great measure to evaluate the performance of the Investment division.

• Indicates other performance ingredients

Disadvantages

• ROI is often used to compare different companies while investing. Still, not all those companies need to use similar policies to account for their valuation of stocks and other assets, including expenditure.

• Several factors affect the terms of profit and investments. Profit has various concepts like profit before tax and interest, profit after tax and interest, and the investment factor.

Factors that affect your ROI?

ROI holds tremendous importance in scaling your business. However, ROI is not just monetary. It would help to consider the factors while measuring your ROI to stay equipped and strategised while growing your business.

Financial Profit figures

This is one of the most common reasons for determining the profit figures your business has made. While calculating ROI, you should always make a total evaluation of the finance you have made. The total finance pertains to the amount of money you have generated. However, the real profit is calculated after extracting all the additional investments you made while executing your services.

Sales Revenue 

This is another aspect you should be interested in to learn about your sales performance. You need to evaluate the number of closed sales, and this will give you the idea to understand the effect of your marketing and whether you need to change it for the future to obtain better and greater sales results.

These are the crucial factors in your ROI. However, more factors like engagement and brand awareness affect your ROI.

How to achieve good ROI?

You have become familiar with the importance of good ROI for your business. To get a good ROI, you can focus on your marketing to help your business thrive.

Here are a few things to keep in mind if you wish to improve your ROI and brand credibility.

1. Plan for a better return on investment

2. Avoid engaging in Vanity Metrics

3. Sales driven strategies

4. Keep changing your strategy and analyse previous mistakes.

Conclusion

ROI stands for return on investment. It is a measure to evaluate and calculate various business prospects. It shows an overall result of your organisation’s performance and its ability to generate profit for the investors. ROI plays a vital role for new businesses or startups looking for growth investments. Return on investment is a crucial aspect of a company’s financial decisions and conditions. A good ROI is vital for young entrepreneurs to survive and sustain themselves in the tough job of raising funds.