Return on investment is a measure used by accountants and investment analysts to determine the investment potential of a particular asset. The calculation compares the cost of the asset with the profit made from the sale of the asset and is usually expressed in percentage terms. Marginal return on investment (ROI) is used to show the incremental affect of increases or decreases in the profit made from the sale of the asset and is commonly used in scenario analysis.
- Return on investment is a measure used by accountants and investment analysts to determine the investment potential of a particular asset.
- The calculation compares the cost of the asset with the profit made from the sale of the asset and is usually expressed in percentage terms.
Determine the cost of the investment. Let's say you purchased securities valued at £6,370 and the commission on the trade is £130. Therefore, the total cost of the investment is £6,500.
Calculate ROI. Divide the profit made from the sale of the investment by the cost of the investment. For example, if the profit made from the sale is £3,250 then the calculation is £3,250 divided by £6,500 or 50 per cent.
Determine the marginal return on investment for an additional £650 in profit. The calculation is £3,900 ($5,000 + £650) divided by £6,500 or 60 per cent. The marginal return on investment for an additional £650 in profit is 10 per cent (60 minus 50 per cent).
Determine the marginal return on an investment which is £650 less in profit. The calculation is £2,600 divided by £6,500 or 40 per cent. This further illustrates that a £650 change in profit is equivalent to a 10 per cent change in ROI.