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Return on Investment (ROI) Calculation

Return on Investment / capital / profit / total investment

Essay Topic:

The pattern of calculating of the return on Investment.

Essay Questions:

What role does return on investments have for any capital investments? How does marketing influence the return on investments? What is the most appropriate formula to calculate the Return on Investment?

Thesis Statement:

It is obvious that the formula required depends on the type of investment and that ROI does not yield to formalization and cannot be entirely universal: ROI= Profit/ Total investment.

 

Return on Investment (ROI) Calculation

Introduction: Without calculating the return on investment (ROI) is not possible to realize any marketing activity and be sure not to loose capital investments. It is essential for making ones marketing activity more effective and uniquely productive. ROI can be expressed for different time periods: one year, one month, one week, one day. This makes it a necessary objective analyst of the marketing activity even for a long period. It also includes possible fees and expenses of the future financial project. When a person realizes an investment there is always a potential to increase the capital in several ways. There are a lot of formulas made to calculate ROI. Some of them are more detailed, some are less. It is obvious that the formula required depends on the type of investment and that ROI does not yield to formalization and cannot be entirely universal. Nevertheless, a general formula can be given:

ROI= Profit/ Total investment

Total investment - total investment, including all the possible fees and expenses connected with the investment. For example, if you bought $8700 worth of stock and your fees were $1300, then your total investment is $10,000 ($8700 + $1300).

Profit - profit or loss associated with the investment. For example if the $10,000 investment in stocks is worth $50,000 one year later, then the profit is $40,000 ($50,000-$10,000).

Therefore, ROI calculated by this formula will be:

ROI=40,000/ 10,000=4, or a 400% annual ROI (Just an example).

This formula is a base in calculating ROI and has a lot of minuses. For instance, is does not consider that it is also necessary to subtract the taxes from a return, possible stock devaluation and many more. In each case is very individual, thats why it is necessary to show a more detailed ROI calculation on a certain example - shares.

The firs step would be to calculate the earnings or losses due to increase or decrease in the price of the share:

Current value of the stocks Price paid for the stocks

Price paid for the stocks

Suppose $3000 was invested in shares one year ago, taking 100 shares at $50. At the present moment the share price is $60. So the investment is worth 60 times to 100- $6000. So calculating the return will give the next result: (6000 3000)/3000= 100%.

Plus shares usually earn dividend payments. So it is imperative to assume that the company will pay, for instance, $3 per share in dividends. So the return will be calculated on the following formula:

Dividends + Current value of the stocks Price paid for the stocks

Price paid for the stocks

300+6000-3000/3000=110%

Conclusion: Therefore accumulating earnings, interests and dividends it is possible calculate the overall return, which is what is really earned or lost by the investment-ROI. But even this formula does not include taxes, which can make a serious influence on the return. RIO is a very flexible calculation that requires detailed analysis and taking into account a lot of variables. For example if we deal with a company that rents equipment and has many employees it is amortization, constant and variable expenses, general influx of bankrolls and many more. So ROI calculation is an imperative smart action of every person who wants to take the most of his investment.

 

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