What Does ROI Return On Investment Really Mean

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Try out the ROI Calculator: https://retipster.com/terms/roi/?utm_... • 0:00 - Intro • 0:06 - The ROI Ratio Explained • 0:25 - An Example of How ROI Works • 0:32 - The Beauty of ROI • 0:48 - What Does ROI Formula Tell You? • 1:00 - Advantages of Using the ROI Calculation • 1:36 - Limitation #1: ROI Ignores Time • 2:09 - Limitation #2: ROI Ignores Risk • 2:29 - Limitation #3: Human Errors Are Ignored • 3:11 - Important Considerations When Looking at ROI • If you invest $10 and get your initial $10 back plus $1 in profit, how much a return did you earn? • Return on investment, or ROI, is one of the simplest calculations in the financial world. In the example above, you would have earned a 10% return: your $1 profit equals 10% of your $10 investment. • An ROI calculator not only helps you run the numbers on past investments but it can also help you forecast returns on future investments. It allows you to compare multiple investments to determine the most promising – and can help you avoid making bad investments entirely. • What Is ROI? • Return on investment is a ratio: your net gain (or loss) on investment over the total amount you invested. It’s expressed as a percentage. • A $1 profit, divided over a $10 investment, equals an ROI of 10% ($1 / $10 = .1 or 10%). • It can also be used to express losses. If you invested $10 but only got $8.50 back, you lost $1.50 so your ROI would be -15%. • The beauty of ROI lies in its simplicity. You use the ROI formula to calculate one-time gains (such as the profit from flipping a property), or ongoing annual income (such as net cash flow from a rental property). When calculating ROI for ongoing income, it’s often referred to as annual yield, as it measures the total annual income generated by your initial investment. • Return on investment tells you how efficient an investment is and how effectively it generates profit for you. It answers the simple question of how much money you can expect in profit for each dollar you invest. • Advantages Limitations of ROI Calculations • Calculating return on investment has its pros and cons. As you evaluate potential investments, keep in mind these advantages and limitations. • Advantage #1: Simplicity • You only need two numbers to calculate ROI: the profit (or loss), and the amount initially invested. Using an ROI calculator like this one makes it even easier. • Advantage #2: Easy Investment Comparison • Should you invest your money in Investment A or Investment B? All else being equal, if Investment A will yield a 10% return while Investment B only an 8% return, then you confidently move forward with Investment A knowing that your money will work harder for you. • Limitation #1: Ignores the Factor of Time • In the real world, time plays an important role in your returns. If two investments both yield 10%, but you get your money back within one year in Investment A and have to wait three years in Investment B, then clearly, Investment A is the better investment. But you wouldn’t know that simply by looking at the ROI numbers. • Limitation #2: Ignores Risk • Likewise, imagine two investments both yielding 10% ROI. But one of them is extremely safe, while the other is extremely high-risk. Obviously, you should choose the safe investment that offers the same return, but ROI by itself contains no information about risk. • Limitation #3: Profit Investment Figures Subject to Optimism, Omission, and False Assumptions • Like any calculation, the result is only as valid as the numbers you input. But in the case of ROI, it’s all too easy to ignore crucial variables when calculating both your potential profits and your investment amount. • For example, novice investments often overestimate their returns when they calculate ROI for a real estate investment by ignoring closing costs. Or they may underestimate their ongoing expenses, such as vacancy rate or the cost of repairs and maintenance. • Join Our Community! • REtipster Forum: https://retipster.com/forum • REtipster Facebook Group: https://retipster.com/facebookgroup • Follow Along! • YouTube: https://retipster.com/youtube • Facebook: https://retipster.com/facebook • Instagram: https://retipster.com/instagram • Twitter: https://retipster.com/twitter • Pinterest: https://retipster.com/pinterest • LinkedIn: https://retipster.com/linkedin • TikTok: https://retipster.com/tiktok

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