Categories
Investment

How to calculate the return and return on investment

Calculating the return on investment and its return is a key prerequisite for success in investing.

In addition to these calculations, the investor should be able to correctly estimate the risk.

The success of every investor and his investment lies mainly in the correct calculation of the return on investment. It can be set in months, years, but also in weeks or days. It always depends on where you invest. In addition to calculating your return, you should also be interested in the return on your investment. Not every security is the most suitable for its owner.

Return on investment

Return on Investment is translated from the English Return on Investment, from which the more well-known abbreviation ROI is derived. The term return on investment expresses the net profit or net loss that is calculated against the initial investment, if you wish. It is usually given as a percentage. It is suitable for investors and, for example, marketing needs. For scientific purposes, the return on investment is determined by the logarithm, but we will not deal with it now.

The return on investment also depends on the risk and the investment horizon.

Return on investment

The calculation of ROI (Return on Investment) is the total return on investment. Return on investment is an important concept for investors, but also for financial directors who work with it in the analysis of ratios in the financial analysis.

How to calculate return on investment (ROI)

The basic calculation that calculates the return on each investment is as follows.

Return on investment = ((net profit – initial investment) / initial investment) * 100 [%]

In practice, it works as follows. We bought shares of Philip Morris for 100 thousand crowns and we want to know what the return on investment will be if we earn 125 thousand for the same amount and the same shares.

Return on investment = ((125,000 – 100,000) / 100,000) * 100 = 25 percent

The return on this investment will be 25 percent.

However, beware of the peasant interpretation of the return on investment. People often call the return on investment the amount they get. In our case, with shares of the Philip Morris tobacco group, that would be $ 125,000, which some people explain as a 125 percent return.

If the purchase and sale of shares were the same for $ 100,000, the return will be zero percent. ROI can also be negative. That is, if the sale of shares will be less than $ 100 thousand. the resulting number will show how much loss we have suffered. Let’s show everything again with an example. We bought shares of Philip Morris for $ 100,000, but due to the unpredictability of fate, we need money back as soon as possible. That’s why we sell for $ 85,000. The calculation will look like this.

Return on investment = ((85,000 – 100,000) / 100,000) * 100 = 15 percent

The loss from this transaction will be 15 percent.

It is extremely important to take into account volatility and other risks when investing, which can bother many investors.

Return on investment II.

Another no less important indicator is the return on investment. Popularly speaking, it’s important that your money is not wasted on a less profitable asset. In practice, the point is that you do not have all your savings, for example, in a personal account, when you can deposit them in a savings account or a term deposit, or buy shares or participation certificates for part of the savings. However, it does not have to be just financial assets.

For example, many people own agricultural land, which they acquired in restitution or inherited. The sale of land and subsequent investment can increase profitability. At this point, however, I do not recommend anyone to sell any land without consulting impartial experts.

However, we can give a model example of what revenues flow from our assets in the form of a hectare field worth 100 thousand crowns.

The value of the field is $ 100,000
Total annual revenues are $ 2,000
The total annual cost is $ 500
The rate of return according to the above formula will be 1.5 percent.

However, if you deposited that $ 100,000 on a term deposit, for example, you can claim a gross return of four percent (ie, $ 4,000) per year.

There is a second way to calculate the investment return. However, it is only an orientation, but a simple and relatively fast method.

It is always necessary to carefully consider whether there will be any change in the current possession of property. For example, an increase in the value of the land price, which would mean not selling at the current price, but wait, for example, several years. You would then need to make another calculation to compare the meaning of holding the asset or selling it and then reinvesting it in another asset.

Study basic concepts such as inflation and the difference between a percentage and a percentage point. This is the only way to get a complete view of the calculation of return and return on investment