Return of Investment (ROI) Calculator: How to Use the Return Of Investment Calculator to Calculate your Earnings
After you start investing, you do so with the aim of getting returns, whether on a long-term basis or a short-term basis. You will realize that long investments give high returns as compared to short-term investments. As you make your investments, a number of factors come into play to make sure you get what you deserve. Some of such factors include rate of return, invested capital, time, and taxes imposed. To know what you are going to earn by bringing all the factors into play, you need to use the Return of Investment Calculator. This tool will let you whether it is worthy of making such investment or not.
What is a Return on Investment?
This is a financial metric that is used to measure the profits you will make from an investment after a specified period of time. We can further define Return of Investment as a ratio that relates to the gain or loss you will get out of your investment in relation to the incurred cost. The Return of Investment simulation is important as it allows you as an investor to make an informed decision as you gauge the potential of returns from several financial institutions.
After understanding the meaning of the Return of Investment, it is now prudent that we further understand the meaning of the Return of Investment calculator.
What is Return of Investment Calculator?
The Return of Investment calculator is a financial calculator that helps you to calculate the Return of Investment. Before you make any investment, you need to make use of the ROI calculator to foresee the results of our investment in the years to come.
The Return of Investment calculator displays the ratio of the net gain to that of the net cost in the form of percentage forms or as a decimal number. For instance, ROI= 10% or ROI = 10%.
Return of Investment calculator is used frequently as it provides the best way of assessing the economic consequences of the investment you will make. This calculator gives values that are easy to understand, making it effective even with beginner investors.
Calculating the Return of Investment
Some companies display their Return of Investment on their websites and you only need to compare them before making an investment decision. Unfortunately, some of the given figures may be exaggerated giving you false projections.
For this reason, you need to calculate your Return of Investment given the set parameters from different company profiles. This is where the Return of Investment calculator and the Return of Investment formula play a major role for you.
The Return of Investment formula is pegged on two important parameters; the cost of an investment and the gain from the specified investment. This results in the following equation;
ROI= (G-C) ÷C where G and C are denoted gain realized from the investment made and the cost incurred during the investment period, respectively.
Alternatively, if you need to get your Return of Investment in percentage form, you can apply an alternative ROI formula that goes as;
Where FVI is the Final Value Investment, IVI is the Initial Value of Investment
When using this formula, you need to keep in mind that it does not include the risks that may occur during the investment period.
Return of Investment Examples
As an investor, if you decide to buy 150 shares of a certain company that is trading at $12.67 per share, the total cost of your investment will be 150 x $12.67 = $1,900.50. If, after nine months, the price of each share rises to $15.23 and you decide to sell all of your shares, you will make; 15.23 x 150 shares = $2,284.50.
The Return of Investment for this investment will be;
Final Value Investment = $2,284.50
Initial Value investment = $1,900.50
Applying the ROI formula;
This will translate to 20.21% or 0.2021
This means that the investment you made was profitable.
Another good example is here:
Suppose you decide to invest in a real estate investment program and purchase a property worth $600,000. After three years, you decide to sell the same property at the cost of $900,00. To calculate the ROI, apply its formula;
This will translate to 50% or 0.5
This indicates that you made a profit of 50% of the invested amount from this investment plan.
Not every time that you may make a profit. Let’s say;
You buy 150 shares of a certain company at a price of $12.67 per share. If the price of the said company plunges and your shares sold at a price of $9.14, then applying the ROI formula,
Final Value Investment = $1,371
Initial Value investment = $1,900.50
This will translate to -27.86% or -0.2786
This means that the investment you made was not profitable, and you made a loss of 27.86%.
Benefits of the Return of Investment Calculator (Formula)
Making investments requires that you take care of specific terms and conditions for you to gain, else you may end up making a loss or losing your investment. ROI calculator is one of the tools that is used by analysis to gauge if you will make a profit from a certain investment.
Some of the benefits of using the ROI calculator include;
It is simple and User-Friendly
Many financial analysis tools are complicated and hard to use in analyzing your financial investment plan, but this is not the case with the ROI calculator. Many investors make use of this calculator on any investment metric as it is easy to use. You only need two figures to come up with ROI; the initial cost and the final sales.
The Return of Investment is universally used by many investors. This means that it is trustable and easily understood across the board. When you talk of the Return of Investment, people will easily understand you making it easy for you to explain your concept.
Limitations of Using the Return of Investment Calculator
Like many analysis tools, Return of Investment comes with a few understandable shortcomings. Some of the disadvantages associated with Return of Investment calculator include;
No Time Limit- Return of Investment calculator does not consider the amount of time your investment will be held on an investment company. This can be an issue when you wish to compare different companies to invest in.
No-Risk Adjustments- the Return of Investment assumes there will be no risks that may occur during the investment period. In case the risks do occur, the Return of Investment may end up giving you false figures that may not reflect the real earnings.
There are some major takeaways that we can derive from the Return of Investment and the Return of Investment calculator as we plan to make investments. If you need an approximate measure of an investment’s probability, then the Return of Investment calculator is the best analysis tool you can employ. Apart from the investment’s probability, we can use the Return of Investment formula to tell the profitability of stock investment, use it to tell whether to invest or not to invest in a specified business, and even gauge the results of a real estate transaction.
Many investors are using Return of Investment as it is easy to calculate and understand. This means that we can use Return of Investment as a standardized measure of the profitability of a certain investment.