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    Return On Investment

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    Marivic Diano
    The document defines Return on Investment (ROI) as a financial ratio used to calculate the benefit of an investment relative to its cost. There are two common ROI formulas: net income divided by cost of investment, or investment gain divided by investment base. An example calculates ROI of 100% for an investment that doubled in value over two years. The annualized ROI formula accounts for the length of time an investment is held. ROI helps investors evaluate investment opportunities and monitor portfolio performance over time.

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    Return On Investment

    Uploaded by

    Marivic Diano
    355 views15 pages
    The document defines Return on Investment (ROI) as a financial ratio used to calculate the benefit of an investment relative to its cost. There are two common ROI formulas: net income divided by cost of investment, or investment gain divided by investment base. An example calculates ROI of 100% for an investment that doubled in value over two years. The annualized ROI formula accounts for the length of time an investment is held. ROI helps investors evaluate investment opportunities and monitor portfolio performance over time.

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    Return on Investment

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    The document defines Return on Investment (ROI) as a financial ratio used to calculate the benefit of an investment relative to its cost. There are two common ROI formulas: net income divided by cost of investment, or investment gain divided by investment base. An example calculates ROI of 100% for an investment that doubled in value over two years. The annualized ROI formula accounts for the length of time an investment is held. ROI helps investors evaluate investment opportunities and monitor portfolio performance over time.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    355 views15 pages

    Return On Investment

    Uploaded by

    Marivic Diano
    The document defines Return on Investment (ROI) as a financial ratio used to calculate the benefit of an investment relative to its cost. There are two common ROI formulas: net income divided by cost of investment, or investment gain divided by investment base. An example calculates ROI of 100% for an investment that doubled in value over two years. The annualized ROI formula accounts for the length of time an investment is held. ROI helps investors evaluate investment opportunities and monitor portfolio performance over time.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    Return On Investment

    (ROI)
    What is Return on Investment
    (ROI)?
     It is a financial ratio used to calculate the benefit an
    investor will receive in relation to their investment cost.
    It is most commonly measured as net income divided by the
    original capital cost of the investment. The higher the ratio,
    the greater the benefit earned.
    Use big images to show your ideas
    ROI Formula
    There are several versions of the ROI
    formula. The two most commonly
    used are shown below:

    ROI = Net Income / Cost of Investment


    or

    ROI = Investment Gain / Investment Base


    The first version of the ROI formula (net income divided by the cost of
    an investment) is the most commonly used ratio.

    The simplest way to think about the ROI formula is taking some type of
    “benefit” and dividing it by the “cost”.  When someone says something
    has a good or bad ROI, it’s important to ask them to clarify exactly how
    they measure it.
    The first version of the ROI formula (net income divided by the cost of
    an investment) is the most commonly used ratio.

    The simplest way to think about the ROI formula is taking some type of
    “benefit” and dividing it by the “cost”.  When someone says something
    has a good or bad ROI, it’s important to ask them to clarify exactly how
    they measure it.
    Example of the ROI Formula Calculation

    An investor purchases property A, which is valued at P500,000. Two years


    later, the investor sells the property for P1,000,000.

    We use the investment gain formula in this case.


    ROI = (1,000,000 – 500,000) / (500,000) = 1 or 100%
    The Use of the ROI Formula Calculation
    ROI calculations are simple and help an investor decide whether to take
    or skip an investment opportunity.

    The calculation can also be an indication of how an investment has


    performed to date. When an investment shows a positive or negative
    ROI, it can be an important indication to the investor about the value of
    their investment.

    Using an ROI formula, an investor can separate low-performing


    investments from high-performing investments.  With this approach,
    investors and portfolio managers can attempt to optimize their
    investments.
    Benefits of the ROI Formula
    #1. Easy and simple to calculate

    #2. Universally understood


    Annualized ROI Formula
    As mentioned above, one of the
    drawbacks of the traditional return on
    investment metric is that it doesn’t
    take into account time periods.

    For example, a return of 25% over 5


    years is expressed the same as a
    return of 25% over 5 days. But
    obviously, a return of 25% in 5 days is
    much better than 5 years!is what the
    end-user derives value from also.
    ROI Formula:
    = [(Ending Value / Beginning Value) ^ (1 / # of Years)] – 1

    Where:
    # of years = (Ending date – Starting Date) /  365

     
    For example, an investor buys a stock on January 1, 2017 for $12.50 and
    sells it on August 24, 2017, for $15.20. What is the regular and annualized
    return on investment?

    Regular = ($15.20 – $12.50) / $12.50 = 21.6%


    Annualized = [($15.20 / $12.50) ^ (1 / ((Aug 24 – Jan 1)/365) )] -1 = 35.5%

    ROI Formula Calculator in Excel


    “A person who never made a
    mistake never tried anything
    new.”
    Credits
    Special thanks to all people who made and shared these awesome
    resources for free:

    Presentation template designed by powerpointify.com

    https://corporatefinanceinstitute.com/resources/knowledge/f
    inance/return-on-investment-roi-formula/
    Thank You!

    Presented by:
    Marivic M. Diano

    God Bless You!

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