ROI

How To Calculate ROI

Business owners need to understand how to calculate it using the right formula before committing to any investment. The financial yardstick will help them compare the profit or loss probability of a particular investment, in relation to its cost. The calculation can be done in two main ways:

Method 1

Method 2

How To Interpret Return On Investment Result

The value can be useless unless you know how to interpret it. Although all the above formulas will give you a percentage value, the result is usually a ratio. Suppose you express it as a ratio, the numerator will represent the net returns, which can either be above or below zero.

That said, a value above zero signals good returns because the profits realized exceed the costs of the investment. On the other hand, a value below zero signals a loss, meaning the cost of the investment exceeds the profits realized. In this case, the net returns are treading the red mark.

Limitations of ROI

ROI is a pretty much less complicated eCommerce yardstick used by businesses across the world to measure the viability of their investments in terms of profits. However, this yardstick has some limitations too, including:

• The analysis doesn’t consider investing holding period;
• It doesn’t assess, nor does it adjust to capital risks;
• The formula has room for costs exaggeration, which can mean inaccuracy;
• The measurement largely hinges on financial gains;
• Not ideal for comparing financing alternatives.

Industries With The Highest ROI

Industries with the highest values usually attract investors because they are highly profitable and returns can be realized after a relatively short while. Here are some industries with the highest ROI globally:

• Retail Industry—22%;
• Technology Sector—23%;
• Capital Goods Industry—16%;
• Consumers Non-Cyclical Sector—16%;
• Healthcare Industry—11%.