The full form of ROI is the return on investment, which refers to the value returns from the investment anyone did in past. Generally, it is the ratio of the income we get to the input cost. ROI is affected by the Invested amount and Returned amount.
It is a performance measure used to evaluate the profitability of an investment. ROI tries to get a direct measurement of the return on a particular investment, relative to the investment cost.
Return on investment(ROI) infographics by Kamlesh Rode
What is Return on Investment (ROI)?
ROI is a ratio between net profit and investment cost.
Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
Return on investment (ROI) measures the gain or loss generated on an investment relative to the amount of money invested.
ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company’s profitability.
The formula of Return on Investment (ROI) and how they are calculated?
The return on investment formula is:
ROI = (Net Profit / Cost of Investment) x 100
Example:
The ROI calculation is flexible and can be manipulated for different uses. A company may use the calculation to compare the ROI on different potential investments, while an investor could use it to calculate a return on a stock.
For example, an investor buys Rs.2,000 worth of stocks and sells the shares two years later for Rs.2,400. The net profit from the investment would be Rs.400 and the ROI would be calculated as follows:
ROI = (400 / 2,000) x 100 = 20%
Importance of Return on Investment (ROI) in choosing stocks
1. ROI is an indication for the investor.
2. Good ROI in past, means the company is giving good returns.
3. Helps understand where the stock company is right now.
4. Sometimes good ROI, means more risk.
5. Proper analysis of stock companies helps reduce the risk.
Market example of Return on Investment (ROI)
I have myself invested Rs.21650 for 10 Shares and now the price is touching Rs.7500 and expected to touch Rs.7700. Look at the below table with respect to my investments.
My current ROI is = (53350/21650) x 100 = 246%
246% return on investment (ROI) is a very huge return for any investor.
Conclusion
When I bought 10 shares of Bajaj finance, it was a corona period. I got huge profits when the stock market recovered. But Bajaj finance gave an average of 14% of return on investment, which is a good number to make a decision for investment.
Why ROI is important in the fundamental analysis of the stock? Please read the fundamental analysis written by the stock forecast team
Frequently asked questions
Ans: The maximum you get after the investment is good, but 5 to 10% ROI is good for stocks.
Ans: It means if you have invested Rs.1000 in stocks and your current value of the investment is 1200 that is 20% growth.
Ans: The return on investment formula is: ROI = (Net Profit / Cost of Investment) x 100
Ans: We will not say 4 percent return is not good, it is a decent return on investment.
