Return of Investment (ROI) – Definition, Formula, How to Calculate

Every business certainly wants to make a profit or profit. In the business world, this profit ratio is known as ROI. Although it looks easy to calculate, there is an ROI formula that needs to be recognized so that the final results can be matched.

Not only in the business world, ROI is also related to investment and stocks. Because it is quite important, let’s take a look at the formula and how to calculate ROI that you need to know in the following article.

Definition of ROI

roi is
Photo by Mikhail Nilov from Pexels

In investing, of course we also have to calculate the potential profit as well as the risk of loss. This is known as ROI. So, what is ROI?

ROI

stands for Return on Investment or can be interpreted as income or return on investment issued. How to calculate ROI is done by adding up the percentage of investment profit based on overall profit and costs that have been incurred. Thus, it can be found the level of profit and risk on an investment.

ROI (return on investment) It is also used to measure the efficiency of an investment. By paying attention and calculating ROI correctly, you can avoid big losses and measure the potential profits that can be obtained. There are two factors that affect ROI including:

  1. Occur turn over, which usually occurs because the turnover of assets is so fast. However, this can be the basis for running business within the company, especially when it happens during operational activities.
  2. Profit margin which is the net profit obtained from the number of sales. The results of this profit margin are usually used to measure profits as well as a sales factor.

The importance of ROI is also supported by the explanations of several financial experts in Indonesia who state that ROI is considered important, because ROI refers to capital investment, assets, and the investment cost budget.

After getting the ROI value, try to analyze the results you get. Is the value negative or positive. If the ROI result is negative, then the investment should be considered because it has the potential to bring about losses.

On the other hand, if the ROI is positive, then the investment value that you have provided is worth the gain and not the loss.

ROI Function

Not only useful for calculating profit and loss risk, ROI has five other functions, including:

  1. This ROI has the main function to measure how effective and efficient the use of investment or capital has been, as well as to measure the effectiveness of production and marketing.
  2. Can be used to compare the level of efficiency in the use of capital with other companies, ROI can be used to find out what are the strengths and weaknesses of the business.
  3. ROI can be used to determine certain actions from this function, it can be seen the effectiveness of allocating all costs and capital to the related department.
  4. ROI can be used to find out how much profit is obtained from each product.
  5. As well as managing as well as a guide for decision making.

Those are the five main functions of ROI. In addition, for an investor ROI is a determinant to continue the investment step or not. Next, Jagoan Hosting will discuss the technical explanation of the ROI formula

ROI formula

The ROI formula is quite simple and not overly complicated. However, the thing that must be noted in applying the ROI formula is to be careful when entering the calculation numbers into the ROI formula. The ROI formula is as follows:

ROI

= (income from investment – ​​investment cost)/investment cost x 100%

Looks simple, but make sure you enter the value according to the terms written yes. Because the difference in the input variables can give the wrong final result.

How to Calculate ROI

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Photo by Mikhail Nilov from Pexels

So that you understand more about the ROI formula above, Jagoan Hosting will explain the steps.

  1. Collect various basic information needed, such as profit and investment
  2. Know what the initial investment is, from the budget to the time spent
  3. After making the equation, you can apply how to calculate ROI

This calculation is often overlooked by companies. This is because companies are often fixated solely on increasing sales. In fact, business needs to be supported by investment, so investment also needs to be taken into account.

So, how to calculate ROI is important so that in the future you can understand the sustainability of investments and can be considered for decisions related to investment. Especially if later the company’s ROI results get positive results, the business will increase and develop into a large-scale business which in the end to support the business requires a larger investment.

Example of ROI

To be clearer and understand the formula above, Jagoan Hosting will review and provide some examples of its application below:

Jagoan Hosting invests IDR 500 million to do marketing or marketing. From the investment results, Jagoan Hosting received sales of its services as much as Rp. 600 million. Then the calculation of ROI is as follows:

ROI = (500,000,000 – 400,000,000)/400.000 x 100%

From these calculations, the results obtained are 25%, so the conclusion obtained is that the ROI of Jagoan Hosting is 25%. This 25% figure is positive, if it is positive it indicates that the total investment cost can be returned, and Jagoan Hosting makes a profit.

However, if the ROI result is negative, it means that the income or profits obtained cannot cover the investment costs that have been invested or incurred by the business owner or investor. How easy enough to understand is not it?

Conclusion

ROI is something that you must pay attention to in an investment and business. With the formula that has been explained, now you can apply it to everyday life. Don’t miscalculate, okay?

That’s the explanation from Jagoan Hosting about the meaning, function and how to calculate ROI that you need to know, especially if you currently have a growing business. In order for your business to stay managed and run well, you also have to spend money to invest in your business.

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