ROI = [Earnings – Initial investment] ÷ [Initial investment]
Return on investment formula now and then alludedto as ROI or rate of return. ROI helps to measures the rate of return on aspecific investment or venture. Moreover, return on investment formula is typicallyutilized to evaluate the benefit for a specific given time.
The rate on inflation equation is preciselylike other equation to measure change, same is the case with return on investmentformula. The base equation for evaluating the rate of change in percentage is:
%∆X = [Xt – Xt – 1] ÷ [Xt – 1]
∆X = change in X
t = at a time t
But in case of ROI, the formula is estimatingthe rate of change in amount after investing. Similarly, return on investmentformula also helps to evaluate the X% in the amount after an investment.
How the return on investment is helpful for investors oranalysts?
Typically, the return on investment equation isutilized for investment & financial analysis. It tends to be applicable toany type of investment no matter if they are inside an organization, anindividual project, or investment in an asset.
Among others, prominent equations which aresimilar to return on investment & analysts use them averagely to measureprofitability includes return on assets return on equity, and return oncapital.
On the contrary return on investment also hasan issue because it doesn’t consider the time value of cash. However, thisissue isn’t damaging enough if one considers the time value of cash. For thatpurpose, the “profit” part of the return on investment equation couldlikewise be discounted to the present value at the initial point of investment.
However, handling this issue can be ramifyingif the investment or payment in the project is going at the different timeframe. Therefore, the NPV (net present value) technique is favorable due tosuch complexities.