Return on Investment (ROI) Calculator

Understanding Return on Investment (ROI)

Return on investment is like what you left in your hand after investing your money, assets, time, efforts, or any tangible or intangible item.

Whether a startup business or a giant company, every business decision depends on ROI; the key is how much value it will add to the company against the investment.

For instance, you have invested $1 into something. So, how much return are you expecting from the investment? More than what you have invested, right?

Understanding return on investment (ROI) helps you make smarter and informed financial decisions. It enables you to achieve sustainable growth.

This article will provide you with a clear understanding of what return on investment (ROI) is, how to calculate ROI, and the real-life implications of ROI.

What is Return on Investment (ROI)?

Return on investment (ROI) is how much benefit or profit you get from the investment cost. It measures the efficiency of your investment.

This decision-making tool helps you decide where you should invest and where not. You can evaluate what you will gain against what you put in.

For example, you are preparing to start a homemade cake-making business. You want to consider the cost of ingredients, packaging, utilities, marketing, and other relevant expenses. When your expected net profit level exceeds all these costs, you can achieve a good ROI.

How to Calculate ROI: The Simple Formula

The simple formula of ROI is: Net Profit / Cost of Investment) x 100.

Net profit = Total Revenue-Total Cost of Investment

Total Cost of Investment = All the costs associated with the investment

ROI Calculation:

For instance, your net profit is $200, and you invested $1000 in the business. Hence, ROI is= $200 / $1,000 = 0.20, or 20%.For every $1 investment, you will get $1.20.

Real-World Examples of ROI

The following are some examples of ROI. It will help you understand how to calculate ROI easily for business and personal purposes.

Example 01

You have invested in a marketing campaign on a popular social channel like Facebook to promote your juice business. 

Suppose your total marketing cost on Facebook ads is $80. You have sold 120 juice bottles directly from the Facebook ads.

The selling price of each juice bottle is $3. Hence, you generated (120*$3) =$360 revenue against selling 120 juice bottles.

Now, consider the cost of goods sold for selling 120 juice bottles.

Ingredients (fruit, sugar, water/ice) = $120

Bottles and packaging =$30

Utilities and Miscellaneous=$20

Total cost=$170

So, the net profit from campaign sales is ($360-$170) =$190.

Finally, the ROI (for marketing) = $190/$80*100 = 237.5%. For every $1 investment, you get $2.375.

Example 02

You bought 50 shares of a company. Each share costs $10. Hence, your total investment is ($10*50) =$500.

After one year, the share price increases to $15 each. The share's current value is ($15*50) =$750.

Suppose you get $1 dividend per share. So, the total dividend is $50. Total return is ($750+$50) $800.

Your net profit is ($800-$500) =$300. Finally, ROI= $300/$500*100=60%. For every $1 investment, you get $0.6.

Example 03

You want to replace your old machine. The annual operating cost of your old machine is $10,000. Its productivity is 4,000 units/year.

The new machine costs $20,000. Its useful life is approximately 5 years. The annual operating cost is $5,000, and productivity is 6,000 units/year.

Suppose you earn $4 profit per unit. The additional revenue you will earn is 2,000 units * $4 = $8,000/year.

Annual savings from the newer machine =$10,000-$5,000=$5,000/year. So, yearly total benefit = $8,000+ $5,000= $13,000/year.

ROI=13,000/20,000 * 100 = 65%. For every $1 investment, you get $0.65.

Why ROI Matters in Business?

Regardless of the business, ROI plays a key role for all companies. Let's learn the importance of ROI in business.

Informed Decision

ROI provides investors with a well-defined quantitative perspective on a particular business. Investors can make more informed decisions. They become more confident in whether to invest here or not.

Quick Decision

ROI is a powerful and sophisticated decision-making tool. It helps you determine the efficiency and profitability of your investment. You can quickly compare opportunities and choose the best option.

Performance Measurement

ROI is a financial metric that enables you to measure the economic performance of your investment. You can evaluate the success of your investment through ROI.

Attract Potential Investors

When a business has a sustainable higher ROI, more investors will invest here. This will scale the company faster. They will earn more profitability quickly.

Things to Consider When Calculating ROI

When it comes to calculating ROI, we often overlook some crucial factors. The following are the key factors you must consider when calculating ROI.

Time Frame

While calculating a particular return on investment, we often omit a factor like time horizon or length of time. You must consider how much time it takes to earn that profit.

For instance, a 50% return in 1 year is better than a 50% return over 3 years. The key is earning more in a shorter period.

Risk

Higher profit often involves higher risks. Various uncertainties and volatility can affect the investment. ROI doesn't consider risk when calculating the profit.

There is no guarantee you will earn the same amount of profit. You need to be a risk-tolerant investor when investing in any business where the ROI very higher than average.

Indirect Benefits

Not all assets have financial metrics. Can you measure your brand value, customer satisfaction, or brand loyalty in terms of money?

Sometimes, you get long-term value from your investment. It might not be visible within a short time. The outcome is not visible instantly. But you can see it gradually in your target market.

Market Conditions

The market conditions for various types of businesses are not the same. They pose different kinds of individual challenges. It can change quickly, which can significantly affect your ROI. What works for other businesses may not work for your business.

It is important to carefully evaluate the market conditions before calculating return on investment for a particular business. This will help you get a more realistic and accurate ROI calculation.

What Is Good Return on Investment (ROI)?

A healthy return can be anywhere between 5% and 10%. But not all industries will have the same standard. Some will have more and some less.

Energy

The average ROI in the energy sector ranges from 8% to 15%. Oil and gas generate more ROI due to higher global demand.

Technology

There is rapid growth and innovation in the technology industry. This sector has around 10% to 25% ROI on average. 

E-commerce

The e-commerce sector is very diverse. Its ROI can be as low as 5% and as high as 30%. However, your business category, size, target market, and other factors impact the ROI.

Consumer Goods

The average ROI in the consumer goods sector ranges from 10% to 20%. It usually has a steady demand. But the product type, the company's market position, and competition will affect the ROI.

Real Estate

The real estate business typically has a steady and consistent annual ROI. It usually has a return on investment (ROI) of 5% to 10%. However, this will depend on the property type and where it is.

Finance & Insurance

You can expect an annual ROI of 8% to 15% from the finance and insurance sector. However, economic conditions are one of the primary determinants of this sector.

Healthcare 

The healthcare sector is quite diverse. You can't expect the same ROI from a pharmaceutical company and a hospital. However, their average annual ROI is 5% to 12%.

How to Improve Return on Investment (ROI)?

Of course, you have to choose a profitable business or asset to gain your desired ROI. However, the following techniques can help you maximize your return on investment.

Plan Thoroughly

Before investing in a business or asset, set a clear goal. Analyze the alternative options to find the best investment. Determine how much ROI you are expecting from the particular field. Consider the risk, market conditions, and other factors.

Reduce Costs

Lower costs make profit margins bigger. This helps you get a higher return on investment (ROI) by making more money. Look at your spending and find ways to save costs for your firm, both fixed and variable.

Increase Revenue 

Higher revenue means higher profitability and higher ROI. Review your current pricing strategies. Utilize effective tactics and strive for new opportunities to boost sales.

Track Everything

Keep track of everything. It lists all the places where money comes in and goes out. Don't miss anything, no matter how tiny the reward or expense is.

Measure Regularly

Don't think your job is done after calculating the ROI once. Instead, review it monthly, quarterly, semi-annually, and annually. 

Conclusion

Regardless of the type of business or asset you invest your money, time, or effort in, it is worth understanding the positive changes you will get from your investment. We have already discussed return on investment and how to calculate ROI using a straightforward method. Before finally deciding to invest in a particular business or asset, consider the probability of getting your desired profit and looking for an option that will give you sustainable profits in the long run.