How to Convert ROI
Original post by Adam Parker of Demand Media
Return on investment (ROI) is a measure of the profit generated from an investment as a percentage of the original investment. As it is a percentage, ROI must be converted in order to give a return in pure monetary terms. Further, it is useful to compare alternative investments when establishing the significance of ROI.
Multiply your initial investment amount by the ROI. For example, if you invest $5,000 in a mutual fund and receive a report saying that the fund has achieved a 15 percent ROI during the past year, multiply the $5,000 by 15 percent. In this case, the answer is $750, which is the nominal profit on the investment.
Add the product to your initial investment. Returning to the example, $5,000 plus $750 yields a sum of $5,750.
Compare the result to the amount given in your portfolio. If the 15 percent ROI listed in the report is accurate, your result of $5,750 should match the amount listed in your portfolio, less any fees and expenses.
Account for alternative investments. While ROI is useful, it sometimes helps to analyze it in a broader context. For example, instead of investing your money in a mutual fund, you could simply deposit it in a savings account to receive risk-free interest. Assuming a 2 percent savings rate, the 15 percent ROI on the mutual fund represents a 13 percent ROI above what you would receive by depositing your money in a savings account.
Tips & Warnings
- While ROI is important, you should also consider other factors such as volatility and liquidity when making investments.
About the Author
Adam Parker is a writer from Virginia. He holds a Bachelor of Science from James Madison University. Parker has written articles for online sources including The Motley Fool, Gameworld Network and Glossy News.