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How to Calculate Return on Investment

Return on investment (ROI) denotes profitability of your venture. To calculate ROI, you have to determine total amount of your investment. There are different ways to calculate ROI in easy steps. In most cases, you will learn about the formula. However in this article we will describe you the greater scope of ROI calculation. We will describe the formula, the acceptable return rate and verifiable tool to estimate the return target appropriateness.

This estimation should include your total fixed as well as variable cost overheads. Then you have to decide your accounting net profit. It should not contain your revenue value which is the total sales volume in currency amount. Finally you need to fix up the time frame for which you want to calculate the return on investment.

Once you get all the three data then divide the net profit amount by total investment amount. The resulting amount would be your return on your investment. In most cases, this result comes in decimal figures. Multiplying the decimal figure with 100 or converting it into percentage will give you your return on investment.

Now the question would be which result would be preferred or targeted. Generally 25% or 0.25 ROI is admired and acknowledged as theoretical proposition. If you get something closer to this, then your venture is doing well. If your venture has higher result then it is doing better in unrealistic circumstances. It has to be around 25%, as accounting and financing principles will get the amount discounted over 10 years period. If your rate of return has diminishing value after 10 years or discounting period; your enterprise is not doing well. The issue is not so complicated. You have to calculate and target that ROI which is profitable today and which will remain profitable after 10 years. 10 years are assumed standard period for ROI target rate fixation and verification as historical data shows that every currency either gain or lose their value over 10 years accounting period.

Follow these simple steps while calculating return on investment to get things right and straight forward to more growth!

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05. Mar, 2011

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