Basic Formula to Calculate ROI
The basic calculate-ROI formula divides annual net profit by total investment, and multiplies it by 100 to convert the result into a percentage.
ROI = Net Profit / Net Investment x 100
Net Profit, also known as Net Earnings, is income after subtracting all expenses and losses from the total revenue for the reporting period. Net Profit is either before tax or after tax, and the ROI varies based on this factor. For investors, net profit equals increase in share value plus dividend during the reporting period.
Total Investment is the sum of debt and equity invested since inception to reap the net profit.
Assuming an investor invests $5,000 in a business venture or equity and receives $875 as her share of annual profit, her ROI for the year would be 875/5,000*100 = 17.5%.
Assuming an investor purchases $5,000 worth of shares, and it becomes $5,200 at the end of the reporting year, and in addition receives $20 as dividend during the period, the ROI is [(5,200-5,000)+20]/5,000*100=220/5,000*100=4.4%
Investors normally calculate ROI annually, but it is also possible to calculate ROI for other time periods. For instance, if an investor who invests $5,000 receives a return of $25 in the first month, then his monthly ROI is 250/5,000*100 = 5%, and his estimated annual ROI is 5 x 12 months = 60%.
The traditional or basic ROI formula is a static measure and works well when the measurement is straightforward. It remains inadequate to calculate the ROI of large businesses where complex factors distort the simple straightforward equation.