An ROI Calculator is a simple tool that helps in estimating the return from an investment. The tool is available online and is free to use. This article covers ROI, its calculation and the ROI calculator in detail.
What is the return on investment ROI?
Investors invest with a purpose to generate returns. And, return on investment (ROI) shows the return from an investment. Return on investment is expressed as a percentage. In other words, the ROI metric is a financial ratio that determines the net profit from an investment against the cost.
Understanding the potential gains from an investment helps in deciding whether or not to invest in it. Checking the historic ROI percentages will help in understanding the trend of the asset.
An investment that delivers promised returns is often considered to be an excellent investment option. Return on Investment ROI is relevant for both fixed income instruments and equity investments. ROI metric is a profitability ratio (financial ratio) that financial experts use for comparing multiple investments.
Computing ROI is simple and straightforward. ROI is a percentage of increase or decrease in the value of an investment. Following are multiple ways to calculate return on investment:
- Net income method
- Capital Gain method
- Annualized ROI
One can use any of the three ROI formulae for calculating ROI:
Net income method = (Net Return on Investment/Cost of Investment)*100
Capital Gain method = [(Final Value of Investment – Initial Value of Investment)/Cost of investment]*100
Annualized ROI = [(1+ROI)^1/n – 1]*100%, where n is the number of years the investor holds the investment
Return on investment ROI calculator
The ROI calculator is a tool that helps in computing the profitability from an investment. The calculator helps in determining the return from an investment across various periods. The ROI calculator requires certain input that one has to enter to determine the ROI. Following are the inputs to the ROI calculator:
- Amount Invested: It is the total amount that one invests in an asset.
- Amount Gained or Returned: It is the total amount of gains from an investment.
- Investment Period: It is the duration of the investment.
Upon inputting the above numbers, the calculator automatically computes the ROI from the investment. The calculator computes the following:
- Total gain/loss on investment: It is the absolute gain or loss from an investment. In other words, it is the amount gained or returned – the amount invested.
- Return on Investment (ROI): It is the percentage value that determines the return from an investment against its cost.
- Compound Annual Growth Rate (CAGR): It is the average annual growth rate of an investment over a given period of time. It is calculated using the geometric average mean.
How does a return on investment ROI calculator work?
A return on investment calculator is a simple online tool that helps in estimating the return that one earns from an investment. One can also use it to calculate the return expected from an investment.
The calculator calculates the return from an investment in terms of value, and percentage using the following inputs.
- The amount that one invested
- The amount that has been returned
- The tenure of the investment
The calculator gives the following outputs for the above inputs:
- Total gain on an investment
- Return on investment
- Compound Annual Growth Rate (CAGR)
The return on investment is the absolute return, whereas the CAGR is the annualized return. Absolute return is the return from an investment over a specific period. One can calculate it using the following formula:
Absolute return = (Ending value of the investment – Investment cost)/ Investment cost
Annualized return is the return the investment has earned each year over a given period of time. It is the geometric average of the return of the investment. One can calculate it using the following formula:
Annualized return = (Final value of investment / Cost of investment) ^ (1/n)) – 1
Where, n is the number of years.
How to use a return on investment ROI calculator
The ROI calculator is a user friendly tool, and all one has to do is enter the following inputs.
- Amount of money invested: It is the amount that one has invested or intends to invest.
- Amount of money returned: It is the amount that one has earned or expects to earn from an investment.
- Investment period: It is the number of years that one has held or wants to hold the investment. The tenure is in the number of years.
Upon entering the above inputs, the calculator will return the following outputs.
- Total gain from investment: It is the return that one earns from the investment. It is expressed in terms of INR.
- Return onfrom investment (ROI): It is the absolute return from the investment. It is expressed in terms of percentage.
- Compound Annual Growth Rate (CAGR): It is the annualized return from the investment. It is expressed in terms of percentage.
Let’s take an example of Mr Madhav. He invested INR 50,000 and got back INR 1,25,000 in 5 years.
- Amount invested: INR 50,000
- Amount returned: INR 1,25,000
- Investment period: 5 years.
Following are the outputs of the calculator:
- Total gain from investment: INR 75,000
- Return on Investment (ROI): 150%
- Compound Annual Growth Rate (CAGR): 20.11%
Benefits of using a return on investment ROI calculator
- Returns: The ROI calculator computes the absolute return as well as the annualized rate of return on investment. One can compute the ROI for varying holding periods.
- Financial Decisions: The ROI calculator helps in making the right investment decisions on the basis of the financial goals.
- Selection of asset: The calculator helps in shortlisting the right asset for investment. For example, one can use it for comparing investments over different holding periods and invest in the best one.
- Compare the results: One can use the calculator to compare the returns from an asset with its benchmark. Also, one can measure the gains from an investment against its cost.
- Online: The ROI calculator is available online and is free to use. Therefore, individuals can use the calculator multiple times to check different outcomes for an investment. This will help them make an informed decision.
Types of returns on investment
Investors invest with a motive to earn returns. Returns can either be in the form of capital appreciation or regular income in the form of dividends or interest or both. Returns are also categorized based on the way they are calculated. Following are the different types of returns based on calculation:
Absolute returns are the point to point return from an investment. It measures the final increase or decrease in the value of an investment and doesn’t consider the time taken for the change in returns.
One can calculate it using the formula below:
Absolute return = (Ending value – Initial value) / Beginning value
Let’s understand this better with an example. Ms Aishwarya invested INR 25,000 and has earned INR 50,000 in 4 years. Aishwarya can calculate the absolute return using the formula
Absolute return = (50000-25000)/25000
Absolute return = 100%
This means Ms Aishwarya has earned a 100% return on her investment in the span of 4 years. In other words, her investment doubled in 4 years.
The annualized rate of return is the return an investment has earned each year over a period of time. It measures the average growth of investment each year during the tenure of the investment.
One can calculate it using the following formula:
Annualized returns on investment = Final value of investment / Cost of investment) ^ (1/n)) – 1
In the above example, one can calculate the annualized return as shown below:
Annualized returns on investment = ((50000/25000) ^ (1/4)) – 1
Annualized return = 18.92%.
This means Ms Aishwarya has earned 18.92% return each year for a tenure of 4 years. In other words, on average, her investment grew by 18.92% every year.
The total return is the actual rate of return from an investment. It includes dividends, interest, and capital gains from an investment over a period of time. It is expressed in terms of percentage. Also, it is a true determinant of an investment’s growth over time.