What Is ROI and How to Calculate It?

What is life without a bit of risk-taking? Well, outside investment ventures from business to stocks or trading, some people prefer to enjoy the thrill and risks involved in playing casino online games. While investments and gambling involve taking chances with the expectation of generating profit, the two are entirely different.

For starters, whereas gambling is usually primarily a recreational activity (even though there are professional gamblers), no one does business or invests just for fun. Additionally, most gambling games are usually games of luck that often need no mental effort or critical thinking on your part, except for skill-based casino games like poker and blackjack.

Unlike gambling, when you put money into any investment, one of the most vital metrics to consider how well it did is the term return on investment (ROI). ROI is a ratio of the profit earned to the expenses incurred during the investment period. And although ROI is considered basic as a measure of profitability, it is still vital as it gives a rough idea of whether the venture in question is worthwhile. So, read on to learn more about ROI and its significance in measuring the performance of your investments.

How to Calculate ROI

To put it in simple terms, return on investment is an evaluation of the value of an investment. Of course, the metrics go a little further than a matter of subtracting the costs incurred over time. There are two main factors that you must think about when calculating ROI, namely:

• The net profit or returns from an investment.
• The initial costs incurred before the end of the investment period.

After considering the above, use the following formula to calculate the return on investment:

In calculating ROI, you may opt to express it as a percentage, i.e., multiply the figure from the left by 100 or as a ratio. For example, if you spend $10,000 on a stock purchase and, after 2 years, sell your shares at $13,500, you would have made a net profit of $3,500. Using the formula, this translates to a 0.35 or 35% ROI. The ROI can also be negative if an investment returns a loss, i.e., if you had sold your shares for $8,000, thus making a $2,000 loss, the return on investment would be:

Factors to Consider When Calculating ROI

Of course, as an investor, you must keep in mind that calculating the value of a venture is not simply about how much you earn. There are other important things to take into account. For instance, taking note of the investment period is a great way to find out the true implications of how much proceeds you really generate.

You can do this by calculating the annualized ROI, which is the ROI over the period of the investment divided by the number of years it was earning a profit. For example, A 35% ROI over a 2-year investment is equal to a 17.5% ROI per annum. This figure can help you in the decision-making process as you plan your ventures and evaluate past investments. Higher annualized ROIs would indicate that an investment is doing great and is viable and worthwhile should you pursue it again.

Annualized ROI is the reason investors may choose to put money into a project or venture that may not promise much in the short term. That’s because it will likely be more profitable with a higher annualized ROI than a longer-term investment that may appear better from the outset. However, for some businesses, the expected ROI may be more than just financial but social. This is where SROI comes in, as it is a measurement of how the social or environmental impacts of investment.

Parting Shot

If you are looking to simply measure the profitability of an investment, the ROI is the best metric to use. However, it also presents advantages when it comes to measuring the performance of a business and achieving company goals.

On the flip side, as with any metric that a business or individual could use to assess the value of an investment, ROI needs to be coupled with other measures. For instance, you can combine ROI calculations with NVP (net present value), which takes into account the time value of money as a result of inflation.

Including a selection of other metrics on top of the ROI gives you a better perspective on the health of the investment, especially if it is long-term. After all, this is how experienced and savvy investors assess a potential investment from several angles to enable an informed decision.