Return On Investment
Return on investment (ROI) is a metric that shows investors how profitable certain investments can be. Any investment can bring either profit or loss, so forecasting the possible outcome is a great way to answer the timeless question – is it worth it?
How to calculate ROI?
There are two basic return on investment formulas you can use:
ROI = ((Gain from investment – Cost of investment) / (Cost of investment)) x 100
ROI = (Net Profit / Cost of Investment) x 100
But what if you’re looking at a long-term investment that takes several years to bring returns? In that case, you need to consider the time factor, too!
The formula for annualizing the ROI:
[(1+ROI)^1/n – 1] x 100% = Annualized ROI
n – number of years investment held
The formula for calculating ROI for multiple years:
(1+x)^T = Multi-year ROI
x – annualized ROI, T – time horizon
These formulas get rid of the time uncertainty aspect and allow you to have a clearer forecast of different investments!
Why calculate ROI?
With the help of the formula, you can evaluate the monetary investment’s potential, expected return, and compare the possibilities. Combining it with the risk evaluation, you get a solid understanding of whether you should invest your money or turn the possibility down.
Also, when you know the expected ROI, you can correct and prioritize your existing expenses according to how effective certain things are. Experiment and find the best of the best!
What is a good ROI?
There are no standards when assessing the final result of the calculation. A positive return is a good return regardless, but the higher it is, the better it is for you. According to Forbes, 7% and higher is a great percentage.
5 industries with the highest ROI:
According to CSIMarket Company, the leading industries in terms of the highest return on investment are:
#1 Tobacco (109.59%)
People love bad habits, and that includes smoking. No matter how bad it is for us, tobacco has always been in demand, and it looks like it will always be. The ROI percentage of the industry proves that point!
#2 Home improvement (55.82%)
Home is the place we all go to at the end of the day. We spend the majority of our time there, so it has to be just perfect for us. People are different, and their tastes are different, so the industry that offers various products for improving the homes and making them unique and the best for the customers respectively takes the second place in the rank.
#3 Computer hardware (43.80%)
Monitors, mice, keyboards, CPUs, and so on – every physical component of a computer system is hardware. Computers are a part of our everyday lives like nothing else, and there’s no surprise that the industry which provides goods for them flourishes.
#4 Forestry & wood products (29.48%)
Nothing feels better than the texture of the real wood. It’s natural, durable, proven to be the perfect material for many purposes – people have been using it since the beginning of time. And that’s understandable!
#5 Retail apparel (25.42%)
For some people clothes are a necessity, for others, it’s pleasure and a way of self-expression. Everyday wear, underwear, sleepwear, shoes, accessories, sportswear, there’s much more to list. The bottom line is that nobody can survive without them.
Now you can calculate the possible outcome of different investments, compare them, and see what suits you and your needs the best! But be careful – no matter how alluring the calculations may be, there’s always a possibility that indirect factors can influence the final numbers.