Finance: Return on Investment
Updated: Sep 14, 2019
When it comes to participating in activities or doing a daunting task, we have all heard the saying “no pain, no gain,” and these are not the only places where this concept can apply. The finance and business world constantly requires individuals to stick with the trends and stay on top of their game. In order to do so, they must know about Return On Investment in detail. If you don’t know, don’t worry because it’s time to face the excruciating pain of learning. You may not like it now but we promise it will help you in the long run.
So let’s get started. Return On Investment (ROI) is primarily a performance measure that evaluates the efficiency of different investments. It directly calculates the measure of the amount of return on an particular investment, relative to the investment’s cost. In order to derive the ROI, the quotient of the benefit of an investment divided by the cost of the investment needs to be determined, then multiplied by 100. If this does not make sense, try to think of the formula as an equation like this:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
To continue, ROI is simpler if broken down into different parts because of its versatility and simplicity. Essentially, ROI can be used as a gauge of an investment’s profitability. This could be seen in a stock investment, expansion of the company/factory, or even through a real estate transaction. The calculation itself is not too complicated, and it is relatively easy to interpret for its wide range of applications. If an investment’s ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options. Likewise, investors should avoid negative ROIs, which imply a net a loss.
Now that we have a little insight to ROI, what developments can come with it? For example, social media statistics of ROI pinpoints the effectiveness of social media campaigns - for example how many clicks or likes are generated for a unit of effort. Similarly, marketing statistics ROI tries to identify the return attributable to advertising or marketing campaigns. So-called learning ROI relates to amount of information learned and retained as return on education or skills training. As the world progresses and the economy changes, several other niche forms of ROI are sure to be developed in the future.
Therefore, Return On Investment or ROI is a good tool to know how to use, mostly since it prevents people from getting tricked. Analyzing ROI can give a person the perfect trajectory of the company and ways to expand it. So, what are you waiting for, ROI can “save your life!”
By Seetha Murugappan
Chen, James. “Return on Investment (ROI).” Investopedia, Investopedia, 13 Dec. 2018, www.investopedia.com/terms/r/returnoninvestment.asp.