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.

Step 1

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.

Step 2

Add the product to your initial investment. Returning to the example, $5,000 plus $750 yields a sum of $5,750.

Step 3

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.

Step 4

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.

References

• The Free Dictionary: ROI

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.