Return on Investment (ROI) Elements and Types

Return on Investment and every detail of the ROI is very important to all investors.

Return of investment (ROI) or return on cost (ROC) is a ratio between net income (over a period) and investment costs resulting from an investment of some resources at a point in time.

A high return of investment means investment gains compare favorably to its cost as a performance measure, Return on investment is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. In economic terms, it is one way of relating profit to capital invested.

People popularly ask: How do we calculate return on investment? What is good return on investment?

What is Return on investment:

Return of investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.

ROI tries to directly measure the amount of return on a particular investment, related to the investment cost. Return of investment is Expressed as a percentage and is calculated by dividing an investment’s net profit (or loss) by its initial cost or outlay.

Return of investment involves the following:

  • Return is a popular profitability metric used to evaluate how well an investment has performed.
  • Return of investment can be used to make comparison and rank investments in different projects or assets.
  • Return does not take into account the holding period or passage of time, and so it can miss opportunity costs of investing elsewhere.

What is the purpose of Return on investment:

In business, the purpose of the return of investment (ROI) metric is to measure, per period, rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment.

It is also used as an indicator to compare different investments within a portfolio. The investment with the largest ROI is usually prioritized, even though the spread of Return of investment over the time period of an investment should also be taken into account.

Recently, the concept has also been applied to scientific funding agencies (eg National science foundation) investments in research of open-source hardware and subsequent returns for direct digital replication.

Return of investment and related metrics provide a snapshot of profitability, adjusted for the size of the investment assets tied up in the Enterprise. Return of investment is often compared to expected (or required) rates of return on money invested,it is not time adjusted.

Marketing decisions have an obvious potential connection to the numerator of ROI profit, but these same decisions often influence assets usage and capital requirements for example receivable and inventories.

Marketers should understand the position of their company and the return expected. Return on investment may be extended to terms other than financial gain. For example, social Return on investment (SROI) is a principles-based method of measuring extra-financial value (that is environmental and social value not currently reflected in conventional financial account) relating to resources invested.

it can be used by any entity to evaluate the impact of the stakeholders, identify ways, to improve performance and enhance the performance of investments.

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How is the Return on investment Developed?

Some investors and businesses have taken interest in the development of a new form of the Return of investment metric, called”Social return on investment”, it was initially developed in the late 1990’s and takes into account broader. Impact of projects using extra financial value (that is social and environmental metric not currently reflected in conventional financial accounts).

Social return of investment helps understand the value proposition of certain environmental social and governance (ESG) criteria used in socially responsible investing practices .

For instance,a company may decide to recycle water in it’s factories and replace its lighting with all led bulbs. These undertakings have an immediate cost that may negatively impact traditional on ROI.

How ever, the net benefit to society and the environment could lead a positive social return of investment. There are several other new variations of return of investment that have been developed for particular purposes.

Social media statistics ROI pinpoint the effectiveness of social media campaigns, for example how many clicks or likes are generated for a unit of effort. Marketing statistics Return of investment tries to identify the return attributable to advertising or marketing campaigns.

What are the elements of Return of investment?

  • Actual campaign costs
  • Actual campaign income
  • Intangible campaign benefits

What are the different types of returns?

  • Absolute returns
  • Annualized returns
  • Total returns
  • Trailing returns
  • Rolling returns

Marketing not only influences net profit but also can affect investment levels too. New plant and equipment, inventories and accounts receivable are three of the main categories of investment that can be affected by marketing decisions.

Return of investment is a popular metric for heads if marketing because of marketing budget allocation. Return on investment helps identify marketing mix activities that should continue to be funded and which should not be funded.

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