The Formula for Calculating ROI - In the investment world, we often encounter the terms ROI and IRR. Both terms are essential to understand as a foundation of knowledge when investing. On this occasion, Whizmin will explain in more detail regarding ROI.
What does the term ROI mean? According to RI Ministry of Finance, Return on Investment (ROI), often called The Rate of Return (ROR), is the percentage increase or decrease in investment in a certain period.
Unlike the IRR, which identifies the annual growth rate, ROI shows the total investment growth from start to finish. Even so, ROI has its own advantages and disadvantages in its application. What are you curious about? Come on, see the following explanation.
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ROI Strengths and Weaknesses
In its application, ROI has its advantages and disadvantages. One of the advantages of ROI is that the calculation tends to be simple, so it is easy to understand. So, the analysis of the ROI can be learned quickly by the general public.
ROI calculations are relatively easy, so many people can help themselves to check investment prospects, measure the benefits of investing in particular institutions, and the potential returns on various investment opportunities to help determine market competition.
Unfortunately, ROI also has downsides. One of them is that it is challenging to compare ROI between agencies because of the different methods. In addition, ROI also ignores the time factor in its calculations. Time will affect the return on investment.
So, even though calculating ROI is easy, you have to do further analysis so that your calculations are more accurate by including other factors.
After knowing the advantages and disadvantages of ROI, let's learn the following formula for calculating ROI.
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The Formula for Calculating ROI
Following its definition, ROI is the percentage increase or decrease in investment in a certain period. The following is the formula for calculating ROI.
Then, how to apply the formula? The trick, you can reduce the number of sales and investments and then divide by the value of the asset itself. Then, the result is multiplied by 100.
With this formula, we can analyze the results. If the results are positive, there is a return on the investment that has been made. Conversely, if the effects are adverse, the investment is not profitable.
For example, the initial investment was IDR 50 billion, now worth IDR 60 billion. This means that the ROI for this investment is 20%, with the calculation [((60-50) / 50)*100]. A positive ROI result can indicate that you get a profit margin from the investment.
The ROI calculation results can be used for almost all investments that have been made. The results will also vary depending on the figures entered as income and expenses. However, for long-term investment, the calculation will be more complicated. This is because it is difficult to accurately project income, costs, and other factors.
This is related to the weakness of the ROI calculation described earlier, which needs improvement for long-term investment calculations.
Example of Case Study of ROI Calculation
In addition to the ROI calculation example, here is another case study example.
Mr. X invested IDR 20,000,000 in ABC company in 2012. He then sold the investment in 2015 for IDR 25,000,000. Thus, the investment ROI value is 25%. Meanwhile, in 2013, Mr. Y also invested the same value as Mr. X. Then, the investment was sold for IDR 25,000,000 in 2018. So, the ROI value of the two assets is the same, namely 25%.
In the simple case above, the ROI values for both are the same. However, when analyzed further, the benefits of Mr. X and Mr. Y differ. Why? Because there are inflation factors in different years. So, the investment evaluation is not necessarily concluded from the ROI calculation. However, the calculation must be analyzed further by involving other factors that can have an impact.
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That is the meaning, advantages, and disadvantages, as well as the formula for calculating ROI. How? The way to calculate ROI is easy. Unfortunately, ROI calculations still have limitations when used for long-term investments.
Besides ROI, there are many other terms in the investment world. For more details, you can learn it through Incandescent Learning. Whiz hope it is helpful for you!
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