Login
Copyright

Return on Investment: Definition, Formula & Example

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What Are Commodities? - Definition, Types & Examples

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:02 ROI Defined
  • 0:27 Basic ROI Formula & Example
  • 1:54 Formula for Shareholders
  • 2:57 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Shawn Grimsley
Return on investment is a crucial analytical tool used by both businesses and investors. In this lesson, you'll learn the basic formula, a variant used for shareholders, and be provided examples.

ROI Defined

Return on investment (ROI) is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment. It is expressed in terms of a percentage of increase or decrease in the value of the investment during the year in question. For example, if you invested $100 in share of stock and its value rises to $110 by the end of the fiscal year, the return on the investment is a healthy 10%, assuming no dividends were paid.

Basic ROI Formula and Example

The basic ROI formula is: Net Profit / Total Investment * 100 = ROI. Let's apply the formula with the help of an example.

You are a house flipper. You purchased a house at the courthouse auction for $75,000 and spent $35,000 in renovations. After sales, expenses, and commission, you netted $160,000 on the sale of the renovated house. What is the ROI?

Your net profit is going to be what you netted ($160,000) minus what you spent ($75,000 + $35,000), so it is $50,000. Your total investment is also what you spent ($75,000 + $35,000), which is $110,000.

ROI = Net Profit / Total Investment * 100

ROI = 50,000 / 110,000 * 100

ROI = .45 * 100

ROI = 45%

If only house flipping was that easy. Keep in mind that you can certainly lose money on an investment. If there is a loss, the formula will yield a negative number. Here's a simple example:

ROI = -1,000 / 5,000 * 100

ROI = -0.2 * 100

ROI = -20%

Formula for Shareholders and Example

Shareholders can calculate the value of their stock investment in a particular company by use of this formula: ROI = (Net income + (Current Value - Original Value)) / Original Value * 100.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher
What is your educational goal?
 Back

Unlock Your Education

See for yourself why 10 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support