Return on investment why do we invest in money? No wonder that we are always looking out for options that will give us the best returns. Most of us try to choose options that have more profit potential and less risk.
Therefore, that we are talking about investments there is one common term that we hear. That term is Return on investment. This is popularly known as ROI. Today let us get all the important details about ROI.
The Definition Of ROI
This is the profitability ratio. First, it measures the profit that a person will gain from an investment. Hence, the calculation is done relative to its cost. Subsequently, this is expressed in percentage. It is one of the easiest ways to get a better understanding of individual investments. It also helps to get a better idea about investment opportunities.
How To Calculate Return On Investment
As already mentioned ROI is a ratio. To get the figure you have to divide the profit that you have made from the investment by the cost of the investment. The formula of ROI is as shown below:
ROI= (Gain from Investment-Cost of Investment)/ Cost of the Investment
Now that we know how to calculate the ROI the next thing that we need to know is about the uses of ROI.
Uses Of Return On Investment
This is one of the best ways to make a comparison between different investment opportunities. Now an investment opportunity that gives you better ROI is naturally a better opportunity. You will find that even companies make use of the projected ROI. Using the projected ROI the companies will try to determine the profit potential of a business opportunity. This will help them understand if they need to go ahead with the investment. You need to remember one thing that ROI is one of the best tools to find out the profitability of an investment opportunity. It will help you invest in only those opportunities that are going to help you get better profits.
Understanding The Limitation Of ROI
This is surely one of the best ways to know about the profit potential. However, there is one problem. It does not take into consideration the risk factor. Now, whenever you are making any investment or are considering a business opportunity along with the profit you also need to consider the risk factor. Therefore, in the case of ROI, you will get to know about what you are gaining. Nevertheless, you cannot find out what you stand to lose.
One thing that you need to keep in mind is the higher the profit potential more the risk involved. Another problem is that ROI is not taking into consideration the time for which the investment will have to be held. This too will affect the profitability.
These are some of the important things about ROI which will help you understand the concept better. While making an investment you must consider ROI. But at the same time, you also need to consider the risk factors involved.