Saturday Brain Storming Thought (96)-15/01/2021 COMPILED BY VR AVINASH KULKARNI
Return on investment (ROI)
Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments
ROI tries to directly measure the amount of return on a particular investment, relative to the investments cost
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment
ROI calculation
ROI = ( current value of investment – cost of investment) / cost of investment
Understanding ROI
ROI is a popular metric because of its versality and simplicity
ROI can be used as a rudimentary gauge of an investments profitability
If ROI positive – profitable
If ROI negative – imply a net loss
Limitations of ROI
Time between purchase and sale needs to be considered
Real rate of return is important than rate of return
Importance of ROI
Financial instruments are usually ranked on the basis of their previous rates of return, which helps an investor make crucial financial decisions
Financial analysts compare the rate of return between companies to determine which stock promises a higher yield
Use of ROI
Knowing your investments impact on your business, you can make important business decisions
1) purchasing a new tool
2) hiring new employees
3) adding a new department
4) sale strategies
Marketing ROI
You can launch both online and offline campaigns to promote upcoming event that your business is hosting
Marketting ROI = (revenue generated from registrations – cost of marketing campaign) / cost of marketing campaign
Helpful tools of calculation of marketing ROI
1) Google Analytics/Ads – gathering and analysing data about your digital audience
2) CRM software – such as HubSpot and Salesforce – maintain healthy relationships with customers by streamlining interaction and gathering important customer data
3) call tracking – to help determine which are leading to phone calls and conversions, allowing you to pivot your strategy accordingly
Good return on investment
Most investors would view an average annual rate of Return Of 10% or more as a good ROI for long term investments
Bad ROI
A negative ROI means the investment lost money, so you have less than you would have if you had simply done nothing with your assets
Healthy ROI
A ratio over 5:1 is considered strong for most businesses
Increase of ROI
One way to increase your ROI is to generate more sales and revenues or raise your prises without increasing your cost
Good time frame for ROI
Three to five years
If you can get past the first-year hurdle, entrepreneur indicates that you can reasonably expect a return on your overall investment in three to five years
Reasons of reducing ROI
1) making buying process cumbersome
2) buying inaccurate and ineffective mailing lists
3) ignoring potential risks
4) complicating the message
5) missing potential costs
Factors affecting ROI
1) interest rates
2) economic growth
3) confidence
4) inflation
5) productivity of capital
6) finance availability
7) wage costs
8) depreciation
9) public sector investment
10) government policies
Strategies to improve ROI
1) find lower cost ways to invest
2) get serious about diversifying your portfolio
3) rebalance regularly
4) take advantage of tax efficient investing
5) tune-out the experts
6) continue investing in your portfolio, no matter what the market is doing
7) think long-term
Pros of ROI
1) simple
2) clear
3) flexible
4) versatile
5) divisional
Cons of ROI
1) room for error
2) variance
3) potential bias
4) manipulation
5) disregards time – ROI does not consider holding period
Real rate of return (RRR)
Measures the return of an investment after adjusting for inflation, taxes and other external factors
Annualized ROI
Measures the return of an investment in a single year
It is calculated by dividing the ROI by the number of years the investment is held
Net Present Value (NPV)
Allows the reader to calculate the present-day value of an investment based on inflation-adjusted projections of its future earnings
Return on Assets (ROA)
Measures a company’s profit for every 1Rs of assets it owns
Return on equity (ROE)
Measures how much profit a company generates for every Rs 1 of company equity held by shareholders
2% Rule
The 2% rule states that if the monthly rent for a given property is at least 2% of the purchase price, it will likely cash flow nicely
ROI increase over a time
If a business grows over time, their revenue will increase, causing their gains to increase over time
ROI affected by depreciation
Since depreciation is a direct expense, it will reduce the net profit of the company
The lower the net profit, the lower the return on total assets will be
Hence depreciation and ROI on total assets are inversely correlated
4% Rule in retirement
You add up all your investments, and withdraw 4% of the total during your first year of retirement
In subsequent years, you adjust the rupee amount you withdraw to account for inflation
Impairment loss
If the sum of the undiscounted future cash flows is less than the carrying value f the asset, then the asset is impaired, and I he company must measure the impairment loss
50% rule in real estate
The 50% rule says that you should estimate your operating expenses to be 50% of gross income
This rule is simply based on real estate investor experience over time
Steps to prepare for an ROI analysis
1) identify direct and indirect costs
2) determine direct and indirect benefits
3) determine financial proxies where appropriate
4) set clear boundaries for the analysis, what issues are most important to focus on
5) set up data gathering tools
Issues affecting Investment objectives
Investors risk tolerance and time horizon
key factors for determining general rate of return on investments
