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What is Return on Investment

What is Return on Investment

21.05.2020

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Proper business management is a task that requires skills and abilities, including working with money. One of the ways to earn more money is to invest them. Speaking about this method of generating income from the money available to the entrepreneur, it is necessary to mention the return on investment.
How does this happen and how to calculate the profitability of a potential investment?

Investment project: general presentation

There are five main stages of the project life cycle, in which you can invest money with the expectation of making a profit in the long term:

  • development of project documentation;
  • mastering technology and achieving planned production capacity;
  • operation of the object, allowing you to return the money invested;
  • obtaining additional profit; the liquidation of the asset (resale).

Return of investments suggests that the investor can withdraw real money from the project in the amount invested by him earlier. Return: how and at the expense of what? The calculation of the effectiveness of the investment project is made on the basis of net income; the part of the income that can actually be obtained from the project; depreciation. Expert opinions on the application of one of these three points differ. At the same time, the receipt of income by the withdrawal of funds at the closure of an investment project is not considered ahead of schedule for profit, showing a payback. Withdraw funds are allowed.

ROI: return on investment

The formula used to calculate return on investment reflects the return on investment. The abbreviation itself when decoding and translating from English means “return on investment”. This indicator is indispensable for calculating the payback. The profitability of a particular project is calculated by one of the universal formulas. To take into account the errors, it is necessary to pay attention to the features of a particular project. Universal calculation formula: ROI = (profit – project cost) / amount invested * 100%.

The resulting value will be the main component of the analysis of the potential investment.

The more profitable the opportunity, the better the result will be for the return on investment formula. A positive value indicates that the company is operating in profit. Incidentally, in practice, the use of the coefficient is common not only among analysts and experts of the financial sector but also in government agencies and credit companies. Owning a certain business, you can apply the methodology to assess the potential profit of the project. The only difference is in the basis: instead of the amount invested in a percentage, the authorized capital is taken.

General approach and consideration of details

How to calculate return on investment? In the simplest case, profitability is easier to determine. It is necessary to take into account all the expenses and estimate the planned benefit, subtracting the number of investments from it. Absolute, percentage – you choose the expression which is more convenient for you. To get the picture depth, you need to very carefully calculate all the costs associated with the implementation of the project. Remember that the investment does not end with the first investment: in the future, it will require new financial injections. In addition, you can take into account and tax payments.

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