Return on investment or ROI is a ratio calculated over an extended period between investments. The value is then compared favourably to the initial cost, which is the total interest paid over time. A high ROI simply means that the returns far outstrip the initial investment. As such a useful performance indicator, ROI is frequently used to assess the efficacy of an individual investment, or to assess the efficacies of a number of similar investments. It can be calculated quickly by applying a multiple regression analysis to current investment returns to identify drivers of change.
There are many different ways in which ROI can be measured. Some analysts look at the level of earnings per share (EPS) and other companies’ sales per quarter, or a fixed average over time. Other analysts look at profit margins or the average price per share over time for a given investment. Still others use market capitalization to measure value. In this article we will focus on small-cap stocks.
Return on investment is simply the amount you actually receive for your initial investment. That is to say, your gain from the sale of one stock is added to your gain for another stock, so that you have multiplied your initial investment by the number of shares that you had invested in that stock. It is important to note that it is possible to lose money on your initial investment, as well as make a profit. It is important to remember that the larger the initial cash flows, the larger the amount that must be paid back to gain that amount of money back.
Return on investment can also be calculated using a time horizon. Time horizons are defined as the length of time it takes for an investment to pay off completely. In terms of using roi for calculating your ROI, if you take your annual return on investment and divide it by the total number of years it took you to earn it, you get your annual ROI. An example might be your thirty year period of investment, divided by six, gives you your annual ROI. This is useful for short term calculation because you can see immediately if your investment strategies are effective or not.
The problem with time horizons is they are based on averages. It is important to calculate a more accurate average because you are dealing with numbers, and an average is only as good as the data it is drawn from. If you find the calculation difficult or confusing, there are many tools on the internet that can help. A calculator tool known as Quicken Home Analyzer can help you calculate your ROI with just a few clicks of your mouse.
Return on investment is one of the more important factors for any successful investor. There are many ways to calculate it, and it is best to have the help of a professional to do it for you. It is helpful to use software that provides you with an overall view of how your portfolio investments are doing, this allows you to analyze areas that may need attention in order to be successful in those areas. Return on investments can be difficult to calculate because of the wide variety of factors that can affect it, but once you understand the formula you can work it into your daily financial planning efforts. Remember that being successful depends a lot on you, so don’t delay implementing the ideas learned here to see what you can do to succeed today!
Baloydi Lloydi is the content manager of Asknoypi.