The return on investment (ROI), The acronym ROI comes from the acronym in English "Return On Investment", this is a financial indicator that measures the profitability of the company comparing the profit obtained in relation to the investment made, that is, this tool allows to know the performance that the company has financially.
It is one of the most useful metrics that should be known about a business, it is essential since it provides information on whether or not there is money gain through the investment that is being made.
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In this article you will find:
How to calculate return on investment (ROI)
In this operation, the numbers can be real or estimated, the simplest way to calculate the ROI value is by solving the following mathematical operation:
ROI = Total Profit - (minus) Cost of Investment / (divided) Cost of Investment.
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ROI = 1000 - 4000/4000
ROI = -0.8
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Multiplying it by 100 gives the profit percentage = -75%
Which indicates that the business has been only 25% profitable.
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If the number is positive (+), profits have been made. If it is negative (-) there has been no gain. Which can represent losses and is also an indication that the financial strategy should be evaluated and some guidelines changed.
Another formula for the rate of return on investment is:
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ROI = Net income / (divided) Investment x (multiplied) 100
For example, the investment of a certain project is 4,000 and the profits obtained in it were 1,000, when applying the ROI formula:
ROI = (1000/4000) x 100
It indicates an ROI of 25%, with which it can be said that the investment had a return of 25%.
When to calculate ROI
The return on investment ROI It is mainly used to evaluate an investment project, if the value is positive the project is profitable, The higher this value, the higher the profitability, it means that a greater percentage of the invested capital is will recover. But on the contrary, if the ROI is less than or equal to zero, it means that the project is not profitable, and if it is carried out, money from the investment would be lost.
In the same way, it allows you to compare different investment projects, the one with a higher value will be the most attractive due to its profitability.
It is worth noting that due to the simplicity of its calculation, this is one of the main indicators used in the evaluation of investment projects, however, it should be keep in mind that it does not take into account the time factor and the value of money as it passes, so it is recommended to use it together with other indicators financial
Prepare a contingency plan
In a project launched, the results should be periodically reviewed and its evolution analyzed, since from there it is obtained important information and decisions can be made that have more effect and bring profits closer to goals raised.
It should be taken into account that things do not turn out as planned all the time, that is why it is It is important to have one or more action plans for different possibilities or scenarios that are present.
So in the progress of the project, if in the third month the objectives are still far from the goal, urgent actions are applied to solve that problem.
