Calculating Return on Investment (ROI) |
How to calculate Return on investment (ROI)?The general formula for calculating return on investment is as follows: ROI = (Net profit/total investment) x 100 For example: If you run a business and your net earning is $25 from a total investment of $400, your return on investment would be calculated as follows: ROI = (25/400) x 100 Calculating ROI using the Du Pont formulaThe Du Pont formula is a little more complicated in the sense that it takes into account taxes and sales. The formula is as follows: (net profit after taxes/total assets) = (net profit after taxes/sales) x (sales/total assets) For example, if you run a business and your net profit after taxes is $35, your total assets adds up to $450 and your sales are $600. Thus your return on investment using the Du Pont formula will be calculated as: =>(35/450) = (35/600) x (600/450) It is important that you understand what you are measuring Are you measuring sales, assets or equity, are your net profit figures before or after tax figures? Mixing these figures without a good understanding of what you are trying to measure may lead to decisions made based on inaccurate data. |
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