How to Calculate ROI (Return on Investment)
ROI, or Return on Investment, is a financial metric used to evaluate the profitability of an investment. It measures how much return you earned compared to the initial cost.
ROI Formula
ROI = ((Gain from Investment − Cost of Investment) / Cost of Investment) × 100
Steps to Calculate ROI
- Identify the total gain or return from the investment.
- Calculate the total cost of the investment.
- Subtract the cost from the gain to determine net profit.
- Divide the net profit by the total cost.
- Multiply by 100 to express ROI as a percentage.
Example
Suppose you purchased a business for $100,000 and later sold it for $150,000.
Gain = $150,000
Cost = $100,000
Net Profit = $150,000 – $100,000 = $50,000
ROI = ($50,000 / $100,000) × 100 = 50%
So, the return on investment is 50%.
ROI is a helpful tool for comparing different investments, but it should be considered alongside other metrics such as time period, risk, and cash flow for a complete analysis.
