The return on investment (ROI) is a financial ratio expressed as a percentage, which measures the profitability of an investment over a selected time period, whether it be weekly, monthly, quarterly, or yearly.
ROI ultimately calculates the percentage change in your initial investment. The percentage change = [ending value – beginning value)/ beginning value] x 100.
Alternatively, ROI = [ending investment value – initial investment value)/ initial investment value] x 100. we multiple by 100 to express the ratio in percentage terms.
For example, if you start your investment with 1000 and end up with 2000 one year later, the percentage change in your investment would equal to:
[(2000 -1000)/1000] x 100 = 100%, which means that you have doubled your investment over one year span, that is two times (2x) the initial investment (1000×2 = 2000). Alternatively, you have made 100% net profit on your investment.
If you make a loss, the result would be negative. Let’s say you invest $1000 and at the end of the month your investment dropped to $500, then:
Initial investment =1000
Ending investment = 500
[500-1000 / 1000]x 100
-0.5 x100 = -50% loss
Substructing initial investment from ending investment would give you the net profit in dollar value, so the ROI formula can be also written as:
(Net profit / initial investment) x 100, which equals the net profit in percentage terms.