Return On Investment (ROI): Meaning and How to Calculate It

Updated on: 5 Jul 2024

When presented with a multitude of investment options, return on investment is a metric that can help you separate good bets from money pits. It allows you to evaluate potential ventures, predict profitability and mitigate risks.

Knowing the formulas to calculate it helps you make informed decisions and ensure that you never miss out on an opportunity to earn maximised returns. To know the ROI – return on investment – formula and how it helps you evaluate investments, read on.

What is Return on Investment?

This metric is a financial ratio that you can use to understand the potential benefits you can receive compared to the cost of investment.

Here is a brief overview of the return on investment:

It is expressed as a percentage and is closely related to concepts of Return on Assets (ROA) and Return on Equity (ROE)
Knowing what is an ROI allows you to compare different investment instruments based on their effectiveness and profitability
The higher the ratio, the higher will be the potential to earn

How to Calculate ROI?

This metric is instrumental in allowing you to assess your investments and make smarter financial decisions. The following is the ROI – return on investment – formula you can use:

ROI= Net Return on Investment/Cost of Investment × 100

Here is how to calculate the return on investment using an alternate method:

ROI= Final Value of Investment – Initial Value of Investment/Cost of Investment X 100

Why is ROI a Useful Metric?

Making smart investment decisions is crucial to get the most from your money. Here’s how the calculation of return on investment can help:

It helps you evaluate the historical success of an investment instrument and the returns produced
For business ventures, it allows you to decide whether to infuse capital for the expansion of a firm or allocate resources based on their viability
Knowing what is a return on investment allows you to compare options and assess whether investment risk outweighs the prospective profits

Understanding Good Return on Investment

As there’s no one-size-fits-all, figuring out what constitutes a good ROI can be tricky. Here are the factors to consider:

Risk Tolerance

Risk-averse investors can opt for investment instruments with lower ROIs for greater stability and predictability, and vice versa.

Investment Period

Determining the right ROI depends on the investment horizon, as a shorter duration generally offers lower ROIs.

Financial Goals

Whether your financial objective is wealth accumulation, income generation or capital preservation determines good ROI for you.

Industry Standards
The right ratio of return also depends on market conditions, competitive landscape and regulatory environment.

Whether you’re eyeing stocks, real estate or entrepreneurial ventures, the calculation of return on investment allows you to earn higher returns. If you need funds for unexpected expenses and don’t want to liquidate your assets, get hassle-free Instant Personal Loans of up to ₹5 lakhs from Fibe.

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FAQs on Return on Investment

What is ROI and its formula?

The following is a brief overview of return on investment-

It is a ratio that measures the profitability of an investment instrument
It compares the gains or losses against the cost of a stock, real estate, or other instrument to determine ROI

You can use the following two formulas to calculate ROI-

ROI= Net Return on Investment/Cost of Investment × 100

Or

ROI= Final Value of Investment – Initial Value of Investment/Cost of Investment X 100

How to calculate ROI in Excel?

Follow these simple steps for calculation of return on investment on MS Excel.

Open MS Excel on your device and create a new spreadsheet
Label the cells as A1 for ‘amount invested,’ B1 for ‘amount gained from investment’ and C1 for ‘ROI’
Enter data in A1 and B1 cells and input this formula- ‘A1/B1’ in a new cell C2
You will get a return on investment in the C2 cell

How to get a 25% return on investment?

An ROI of 25% is an ambitious target and will require you to take higher risk. It is crucial to note that there is no guarantee that an investment instrument can provide this much return year after year.

Is ROI calculated annually?

You can compute this metric for any period. Most commonly, it is calculated on an annual basis.

How to get a 10% return on investment?

You can invest in the following instruments to earn this much return:

Growth stocks
Real Estate
Corporate Bonds
Index Funds
Exchange-traded funds (ETFs)

However, note that the returns can fluctuate depending on the market conditions. Diversifying your portfolio can help you better manage this risk and get the best returns.