What Is Return on Investment: Calculation, ROIC, Risks, & Usage


Regardless of whether you work on the stock exchange, are an online player, work for an investment company or carry out an advertising campaign, ROI is of great importance in the work of these individuals and companies.

So, what is Return on Investment – ROI?

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI tries to directly measure the return on a particular investment in relation to the cost of the investment. To calculate return, the return on an investment is divided by the investment cost. The result is expressed as a percentage.

How to calculate Return on Investment?

Calculate ROI by dividing the total net profit by the total cost (the stake). The answer to the equation is a ratio that can be described as a percentage.

The net result is your total winnings minus your total bet.

For example, if you bet $100 on a game at odds of 1.80 and win, then your gross profit is $180 and your net profit is $80 (180 (gross profit) – $100 (bet) = $80).

A positive net result is called a net profit.

If you have lost your entire bet on the same bet, the net result is negative by as much as your bet.

A negative net result is called a net loss.

  • Gross profit – Cost (efforts) = Net profit
  • Net profit / Cost (efforts) = ROI (%)

ROI calculation Example 1

You have played 20 games with a stake that was $100 per game. Your total bet is $2,000 (20 x $100). After the games, you have a total of $2,120 (your gross profit), which means that your net profit is $120.

Your Return on investment calculation will then be as follows:

  • $2,120 (gross profit) – $2,000 (contributions) = $120 (net profit)
  • $120 (net profit) / $2,000 (bets) = 0.06 (your ROI is 6%)

In the calculation example, your return on investment is 6 percent. In other words, you have had 6% in ROI.

Calculating ROI Example 2

You have played 87 games with a total bet of $5,867. After the games, you have collected a total of $7,823.

Your ROI calculation will be as follows:

  • $7,823 (gross profit) – $5,867 (bets) = $1,956 (net profit)
  • $1,956 (net result) / $5,867 (bets) = 0.33 (your ROI is 33%)

In the calculation example, your return on investment is 33 percent. In other words, you have had 33% in Return on investment.

Example 3 of calculating Return on Investment

Your friend has played 65 games with a total bet of $1,007. After the games, your friend has $783.

Your friend’s ROI calculation will be as follows:

  • $783 (gross profit) – $1,007 (contributions) = –224 (net profit)
  • SEK –224 (net result) / $1,007 (bets) = –0.22 (your ROI is –22%)

In the calculation example, your friend’s return on investment is minus 22 percent. In other words, your friend has had a negative ROI of 22%.

What is Return on Invested Capital

A company’s return on invested capital (ROIC) shows the company’s ability to generate capital on investments.

By comparing a company’s return on capital with its cost of capital, it is possible to assess whether the invested capital was used effectively.

The invested capital can, for example, be invested in buildings, projects, machines or other companies. The following formula is used to calculate the return on invested capital:

Return on invested capital = Operating profit after tax ÷ Invested capital

The difference between ROI, ROIC and ROE

ROIC stands for Return on Invested Capital and is calculated in exactly the same way as Return on Investment. The terms are also sometimes used as synonyms, but have two significant differences that may be worth knowing:

Difference 1 – Overall or specifically

• ROIC shows the return on the company’s total invested capital.

• ROI shows the return on a specific investment.

Difference 2 – Time period

• ROIC is measured over a specific period of time, usually 1 year.

• ROI has no set time period, but can vary based on the type of investment.

What the ROI calculation shows is how successful an investment has been, that is, how large the return on a single investment is.

It can, for example, be an investment in a new customer service system that will streamline daily work.

ROIC shows how well the company manages to generate profit through its investments on a larger, overall level.

Set goals for Return on Investment and action plan

Use the key figure ROI as it is a very simple and clear way to be able to demonstrate whether the work or investment gives a positive or negative result and in this way then decide which documents should come next.

Before making an investment, no matter in which business area it applies, you should set goals or limits that you stick to.

Set limits

Would it turn out that you are losing money, that you have lost parts of your investment, the question you must ask yourself then and something that you should have asked before the investment was made, when has the bottom been reached?

You should have set a limit here that if, for example, you have lost 25% of the original investment, you should drop out and take the slap or wait in the hope that it will turn around?

A golden rule is to never invest or bet more than you can afford to lose.

You must be prepared for the fact that the whole thing may go in the exact opposite direction of what you are hoping for and, in the worst case, to lose the entire amount.

Adjust your goals

Should you instead demonstrate a positive ROI where you actually get a return on your investment, then you should continuously follow the trend and also quickly decide whether to adjust your goal as time goes on or cancel when your original goal has been achieved.

Say that before you started the work, you had set a goal of 5% in return, but then it jumps up to 7%.

You can then adjust and set a new limit of 6% where you are still above the original goal while you have a continued opportunity to make a higher profit.

Of course, there is a risk in this, as the return can fall quickly, and cross your adjusted limit.

The question you have to ask yourself is whether you should have ice in your stomach and let it lie or take the safe path and pick out the investment as soon as the goal is reached?

Do a Return on Investment risk analysis

Regardless of which sector it is, which ROI goals have been set, you should have carried out an ROI calculation or risk analysis before the work starts, which shows whether the investment and stated ROI goals are really within reach.

Be well-informed, do research and be as prepared as you can be, before making the investment decision.

When it comes to stocks, check the trend from before, it applies to online players, check the resistance and their results, it applies to marketing, take a look at previous campaigns and compare.

The more information you have, the greater your chances of a positive ROI in the end.

Conclusion

Use Return on Investment properly

Most people probably associate Return on Investment with the stock market, stock trading and the like. In these cases, the number can be used by investors to analyze a company’s historical success (or failure) with previous investments.

It is not a financial instrument that should be used in isolation, but in combination with other figures and analysis methods, it can provide very useful information about a company’s ability to manage its capital, and thus its future.

However, ROI is not only used on the stock exchange.

It can be used for private investments of other varieties. Some are, for example, the construction of attefallshus with the purpose of renting out.

Then the construction cost can be seen as an investment cost and future rental income as a return. The calculation will be exactly the same. Even in the casino and poker industry, Return on Investment is in principle as common as in stock trading.

Everything that has an initial cost and that is expected to give something back in the future, can be seen as an investment and thus also analyzed with ROI.

Kevin Stenqvist

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

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