What are we talking about? Return on investment is a metric of the effectiveness of money invested in a project, business, startup. It is calculated at the start of financing to have an idea of what income to expect in the future.
What to consider? The calculation of efficiency is carried out using special formulas. Some investors will be satisfied with knowing the coefficient in percentage, others cannot do without the profitability index and internal rate of return. And the obtained result will always have to be compared with something.
The article explains:
What is Return on Investment
Formulas for calculating the return on investment ratio
What is considered a normal return on investment?
Criteria for assessing the obtained result of calculating the return on investment
Factors Affecting doctor data package Return on Investment
What is the Return on Investment Index
Analysis of the return on investment index PI
Example of calculation and analysis of the project profitability index
IRR for measuring return on investment
How is IRR calculated?
Calculating IRR in Excel
Analysis of the data obtained from the IRR calculation
Frequently Asked Questions About Return On Investment
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What is Return on Investment
Before investing money in a project, the sponsor must make sure that he will be able to make a profit and not waste all his funds. To do this, it is important to calculate the return on investment using a special formula. This shows the profitability of investing funds over a certain period of time. The parameter is also designated as ROI (Return on Investment) - the coefficient of payback and return of the contribution. It determines whether it is advisable to invest in a particular organization.
The return on investment indicator reveals how effectively equity or borrowed capital invested in the organization's activities over a long period of time is used.
Return on investment
Source: shutterstock.com
The return on investment of an enterprise shows whether the management of the organization effectively invests funds in its core business. The higher this indicator, the more effectively the company operates, it can count on greater profits with an increase in the amount of capital.
The main elements of profitability are:
expenses;
profit;
time interval.
ROI is good for comparing the profitability of projects.
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Formulas for calculating the return on investment ratio
In percentage terms, the coefficient is calculated as follows:
ROI = Profit for the period / Cost of investment × 100%
If the result is higher than zero, then the investment is considered profitable, if less - not. This parameter is determined for different investment options.
Let's say an investor purchased five shares of an organization at a price of 1,000 rubles each. After 12 months, he received dividends of 50 rubles from each share. The price of shares rose to 1,100 rubles over the same period.
Thus, the average annual return on investment was:
(5 × 50 + 5 × 100) / 5000 × 100% = 750 / 5000 × 100% = 15%.
This is a general formula for calculating profitability, but the coefficient can also be determined in another way. There is a method of calculation based on current financial statements:
K ri = p.2400
0.5 × (line 1300 start + line 1400 start + line 1300 end + line 1400 end )