Return on investment (ROI)-ALL YOU NEED TO KNOW – COMPILED BY VR AVINASH KULKARNI

Return on investment (ROI)-ALL YOU NEED TO KNOW – COMPILED BY VR AVINASH KULKARNI

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

1) investment objectives

2) age and financial responsibilities

3) liquidity (availability of funds)

4) risk bearing capacity

5) investment timeline

Compiled by

Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

Return on investment (ROI)-ALL YOU NEED TO KNOW