Return on Investment – Why it is Important to Know About It

One of, if not, the most important concepts in the business and investment world is the return on investment or ROI. It is understandable, however, how most people do not have a good understanding about ROI. Its complex nature can sometimes be too much for some.

The main purpose of ROI is a form of measurement in the business world. It can calculate the whole value of a business or company or that of the company’s specific venture. Another possible use is to make quantitative comparisons between two different investments such as the details in getting new machinery or the payment involved in additional marketing tactics.

In technical terms, ROI is basically the net gain of a venture divided by the total cost of the investment. Another aspect of ROI is the time period set for the specific venture. This is an element that some people tend to take for granted and sometimes even forget. Its importance is highly essential in determining the full potential and real deal function of the investment, monetary or otherwise.

Since investments vary by nature, there are also differences they entail in terms of details in the ROI. For one, there is the investment itself. If the investment is on something that does not get consumed over a period of time such as an equipment or tools that can be used over a longer period of time before they get damaged or become unusable, it is possible for the investor to gain more profit for the said items even after the initial cost has been covered and returned already.

One of the great things about return on investment is the fact that it is applicable to a good amount of investments. Because of this, anyone can make sound decisions over a venture based on a quantitative analysis of the costs and benefits of the said investment. It also gives one a chance to make some changes in order to fully maximize the possible returns for the specific investment.

ROI is a very simple matter to calculate and work with. This is a great advantage considering how many people can easily get into the basics of ROI and utilize its potentials for the sake of their business endeavors. However, this advantage proves to be a source of weakness as well. It can easily be manipulated to make decision makers go toward or get away from certain investments.

When an investor is faced with a crisis pertaining to the specific business or company to invest on, it can be quite a stressful situation. This is a good chance to make use of ROI to determine logically, quantitatively and overall smartly which investment to go for. Although there are other factors other than the ROI, such as the industry and the personal interest in it, getting a good idea on how the ROI is going to be can do quite a lot in one’s decision making.

There is presently a large selection of ROI formulas one can choose from. One of the most popular ones is the DuPont Formula that was created in the 1920s. This specific variation basically divides the ROI into two aspects namely, asset efficiency and profit on sales. Another variation is the return on equity or ROE, which has been used and proven to be effective in the stock market arena.

Before any ventures are taken, it is necessary to get an effective computation of its return on investment. This is something an investor should know about and fully make use of.

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