The return of investment formula or the ROI is a simple way of evaluating investments and making investment decisions. Before understanding the different aspects of the return of investment formula, it is important to understand the mathematics behind the ROI formula. In order to calculate the ROI, the return on a particular investment is divided by the total cost of the investment. The final result is expressed as a percentage. The formula is expressed mathematically as ROI = (total return of an investment-the total expenditure of the investment) / total cost of investment.
The ROI can also have a negative value if the investments suffer losses and the total return from an investment is less than the total expenditure behind the investment. A negative ROI value is an investor nightmare.
As is evident, the ROI formula is a simple formula that can give the investor a fair estimation of the profits (or losses) of an investment decision. However, it must be remembered that the simplicity of the formula makes it vulnerable to manipulations. What that means is that if the hidden values of an investment are not included in the return on investment formula then the formula will not be a fair estimation of the investments. Therefore, there is a high risk of being misled by the return on investment formula.
Whenever an investor is presented with a return on investment formula statistics, the investor should make sure that he or she properly verifies the sources of the different parameters of the formula. The total return on investment should include the most current statistics as investments never cease to function. A calculation of returns also requires an updated knowledge of the stock market conditions. The investments expenditure section is also a critical parameter of the ROI formula. Since an investment expenditure is made in different forms, so it must be made sure that all the different forms of investments are taken into account when calculating the ROI percentile. This is especially true when the investor is examining the ROI values of a corporate concern, because a corporate concern, by default engages in different methods of investment all of which are not disclosed for public scrutiny.
The use of the return on investment formula, if properly used, can be to have a fair estimate and comparisons of different investments decisions. In fact, the simplicity of the ROI formula enables homeowners and small enterprises to use the formula along with the corporate big names. The return on investment formula is especially a very efficient tool of a personal budget worksheet as the general investor can clearly make a decision about what to do and what not to do. The ROI formula can also be used to have a fair comparison of different investment strategies and to calculate the percentage of increment (or decrement) on an investment.
Finally, an important factor to be kept in consideration in the ROI calculations is that the time factor is not included in the formula. The time factor should be kept in mind while you are evaluating the return on investment formula percentages presented to you.
This is something you should be using before making ANY investment decisions.
