Today we are going to talk about the notion of ROI, different ways of calculating it, and its implementation. This concept is often used to understand if any investment/business is profitable. For example, on Finmax FX you can invest in crypto.
This formula is also very often used by investors to calculate stock returns. The amounts of investments and profits are indicated in such cases for a clearly defined period. The biggest pros of this approach are how easy it is to use and how big the field of the potential usage of this.
So, to come up with a return rate, you have to determine your profit and multiply that by 100%. To determine the profit, that we multiply by 100%, we have to subtract the number of money spend from the total gain and then divide the received number by the amount of overall money spent.
Following the calculations, we get the next formula:
ROI = Profit x 100%
ROI = ((Money gained – money spent) / money spend) x 100%
This is the simplest and most popular formula. Most marketers and entrepreneurs use it.
By making the difference between profit and cost, we get the final income. This is the real profit of the company. The ratio of real profit to the size of investments shows how much the first value exceeds the second. In the end, the total is multiplied by 100 percent. After the calculation, the following conclusions are drawn:
- If the value is less than 100%, the company’s activity goes into negative territory, the investment does not pay off.
- If the value is 100%, the company’s income is equal to its expenses.
- If the value is more than 100%, then the company’s sales go up, and the advertising channel is successful.
The resulting value is the degree of difference between profit and cost. When you change one value, the whole proportion changes. How is ROI calculated for financiers? To do this, the reporting period is added to the previous formula. We get the following formula:
Return (period) = (amount of investments thouhout the period+ profit for the period – investments) / investments).
This is a calculation of profitability for the period of ownership of an asset, which allows you to determine:
- How much the volume of financial investments has grown by the end of the reporting period?
- What is the profitability from owning stocks or other securities?
In the field of medium and small business, the two formulas described above are sufficient. They are flexible enough that they can be extended to determine profitability:
Here is how to do it on a practical example:
1. A car manufacturer sold 100 vehicles in a year at a market price of $ 5,000 each. The total revenue is $ 5,000 x 100 = $ 500,000. The cost of one car is $ 2000 x 100 = $ 200,000. We need to assess ROI. But what will we include in the investment amount? If we want to take into account all possible costs, then the investment amount will include not only the cost of goods but also marketing costs, other costs that are not included in the cost.
Let’s say marketing and ancillary expenses for the year were $ 200,000. Then, ROI = ($ 500,000 – $ 200,000 – $ 200,000) / ($ 200,000 + $ 200,000) x 100% = 25%. The result is ROI = 25%.
2. Let’s try to calculate the return on investment in a small business. Take a local ceramic tile factory as an example. We have the following data: The size of the investment or the cost of the factory is 10,000 dollars. Profit (per month) – 5,000 dollars . Monthly costs – 4,000 dollars.
ROI = ($5,000-$4,000) *12/10000*100%=120%. The average payback is 1.2 dollars for each dollar.
Acquiring this business can be risky. Its profitability does not greatly exceed the break-even limit. When considering a deal, you need to pay attention to sales volume depending on the season, market competition, the cost of raw materials and materials.
What Is A Good ROI?
ROI is a metric that is meaningless without context. You can get great value when the firm’s profitability is low. Knowledge of return on investment, and lack of knowledge of real profits and costs, will not allow you to get the maximum profit. Therefore, there is no good or negative ROI.
You should always consider other company data:
- If you get the maximum profit with the maximum sale of goods, then it’s time to increase your ROI.
- If this does not happen, it is necessary to reach the maximum point, in other words, start investing in expanding the sales market (increase the promotion budget and reduce ROI).
Example: You own two enterprises with similar products. The first company has higher profitability. It may seem that she is more successful. However, the second firm sold more products and received double income. Let’s say that the maximum amount of products that can be created in the current month is 50 pieces.
It will be unrealistic to sell such a quantity, so the products will go to the warehouse. You can regularly invest in promotion until these 50 products are sold (the condition is that ROI must exceed 100 percent, and the firms will not be unprofitable). As soon as this indicator is reached, you can optimize spending on promotion and increase ROI.
If you are interested in even more business-related articles and information from us here at Bit Rebels, then we have a lot to choose from.