Return on investment

Return on investment

Return on investment, or ROI, is important for individuals and corporations. Decision-makers are guided toward the best resource allocation, risk assessment, and performance evaluation by ROI, which acts as a compass. In the current world, ROI is essential because it enables people, organisations, and communities to make wise decisions, allocate resources wisely, track performance, draw in investments, and promote growth and development. 

What is ROI? 

ROI is financial information used to assess the profitability or effectiveness of an investment. It measures the investment’s gain or returns on its cost. ROI is computed as a percentage by multiplying the net profit or gain from the investment by the initial investment cost. It helps evaluate the success or performance of an investment by giving a numerical representation of the return received on each dollar invested. Individuals, companies, and investors frequently utilise ROI to evaluate and contrast various investment options and come to wise financial conclusions.  

Understanding ROI 

ROI aids decision-makers in determining where to deploy resources and evaluate an investment’s possible financial returns. A profit was made from the investment if the ROI was positive; otherwise, it was negative. Projects, marketing initiatives, purchases of equipment, and training initiatives can all be evaluated using ROI. Businesses can improve their profitability and performance by analysing ROI to find improvement areas and efficiently allocating resources. 

Calculation of ROI 

The following are the steps to follow for the calculation of the return on investment: 

  • Identify the investment’s initial cost. This sum covers the entire investment and any fees or other costs related to the transaction. 
  • Determine the net profit the investment produced and can be acquired by deducting the initial investment cost from the investment’s end value or total income. 
  • Multiply the initial investment by the net profit. 
  • To express the return on investment as a percentage, multiply the value by 100. 

 Thus, the formula for calculating the return on investment is as follows: 

ROI = (Net Profit / Initial Investment) x 100 

Return on investment

Advantages of ROI 

The advantages of ROI are as follows: 

  • ROI offers a precise gauge of the effectiveness and success of an investment. It enables investors to evaluate the efficiency with which their capital has been used and the acceptability of the returns produced. 
  • ROI is a key consideration when deciding whether to move through with an investment, expand a firm, or allocate resources. It offers a measurable foundation for assessing the viability and profitability of different solutions. 
  • ROI aids in coordinating investment choices with particular monetary objectives. By estimating the projected ROI, investors can decide whether an investment fits their targeted returns and the time frame for reaching those goals. 
  • ROI makes it possible to keep an eye on your investments. Investors can spot any outliers or areas needing attention by comparing the actual ROI with the predicted ROI. This enables alterations and tweaks to improve investment performance.
  • ROI makes contrasting various investment options simple. Investors can examine their options objectively and select the one with the highest prospective returns by calculating the ROI for each one. 
  • Assessing an investment’s risk with the aid of ROI. By examining the ROI, investors can determine whether the prospective profits outweigh the degree of risk. By taking into account the risk-reward trade-off, it aids in helping to make informed judgements. 

Disadvantages of ROI 

The disadvantages of ROI are as follows: 

  • ROI generally emphasizes monetary gains while ignoring other essential elements like social effect, environmental sustainability, or long-term viability. It could fail to consider the hazards or non-financial advantages of an investment. 
  • ROI calculations measure returns over a given period and are time-dependent. This is a concern when evaluating long-term investments that take some time to start paying off or when comparing investments with different time horizons. 
  • The timing of cash flows is not considered by ROI. Investments with a slower rate of return but a steady stream of cash may be preferable to those with a high rate of return but erratic cash inflows. 
  • Risk analysis needs to be taken into account in ROI calculations. High profits on investments could also come with increased degrees of risk, which could result in unforeseen losses or volatility. 
  • When evaluating several investment options, ROI alone might not give the whole picture. Risk tolerance, liquidity, and anticipated market conditions should also be considered for a thorough examination. 
  • The method used to quantify expenses and returns may affect ROI estimates. Different ROI calculations based on different approaches may produce inconsistent results when comparing investments. 

Frequently Asked Questions

ROI can be used to prioritise and evaluate different investment possibilities by dividing the net gain or benefit by the investment cost, and the method can be used to determine the profitability of investments. 

To make comparisons between different periods easier, annualised ROI determines the average rate of return on investment over a year while accounting for compounding effects.  

ROI is important in business since it aids in assessing the profitability and efficiency of investments, informs decisions about allocating resources, measures performance draws in investors, and maximises financial gains. 

A ‘good’ ROI is a relative term that varies with the industry, the type of investment, and risk tolerance. A good ROI often exceeds the cost of capital or industry benchmarks. 

 A yearly ROI of around 7% or more is regarded as a good ROI for a stock investment. When adjusted for inflation, this also refers to the S&P 500’s yearly average return. Given that this is an average, your return might vary from year to year, either increasing or decreasing. 

The benefits of calculating ROI include assessing the profitability and efficiency of investments, assisting in decision-making, prioritising resource allocation, identifying areas for improvement, measuring performance, luring investors, and ensuring a strategic approach to maximising returns on investments. 


Related Terms

    Read the Latest Market Journal

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 24 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 48 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 43 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 18 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 102 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 96 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 51 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 123 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066