Return on Investment estimates the loss and gain generated on the amount of money invested. ROI (Return on Investment) is generally expressed in the percentage to analyse an organisation’s profit or the earnings of different investments. In simple words, Return on Investments estimates what you receive back as compared to what you invest.
Return on Investment can be used in different ways to calculate the profitability of the business. It can be used by a company to estimate inventory investments, pricing policy, capital equipment investments, etc.,
Pros of Return on Investment:
- It is a tool used to calculate various financial investments of a company
- It is also used to manage which actions or projects to go after based on their prospective profitability.
Cons of Return on Investment:
- Though is evaluates the potential gain from an investment, but doesn’t show you what a company have to lose.
- The traditional method for evaluating Return on Investment doesn’t show the time carried out on an investment, which can affect a company’s profitability.
- It doesn’t consider the non-financial advantages involved in a project.
Return on Investment Formula:
ROI = Net Profit / Cost of Investment
An organisation can use Return on Investment formula to evaluate the potential profits gained from an investment, while an investor can apply this formula to calculate Return on Stock
Example, an investor purchases ₹1,00o worth of shares and sells the stock two years later for ₹1,200. The net profit from the expenses would be ₹200, and the Return on Investment can be calculated as below.
Return on Investment= 200/1000= 20%
So, in the above example, the Return on Investment will be 20%. However, the estimation can be modified by subtracting taxes and fees to view more detailed Return on Investment total.
The above mentioned is the concept, that is elucidated in detail about ‘What is Return on investment’ for the Commerce students. To know more, stay tuned to BYJU’S.