ROI

Return on Investment

By: Don G. Mehling, CFA

Roi (Peacock Grouper)

Roi ROI

What is an Investment?

Finance definition: The action or process of

investing money for profit or material result.
What that means: Let people use your money
and you expect them to pay you more in return.

Definitions

Ownership Investments

Lending Investments

Your savings account, Bonds of all types,

Certificates of Deposit

Cash and Cash Equivalents

Stocks, Options, Commodities, Futures Contracts,

Business, Real Estate, Other Precious Objects

Money Market Funds

Not an investment:

Your education (you cant sell it)

Consumer purchases (if you consume it; its gone)

Types of Investments

Is there the potential to profit?

Sales Price Purchase Price = Profit

Key Word: Potential

Not every investment works out; bad investments

are still investments just bad.
aka: Losses.

The Decisive Test

Come or go back to a place or person

Its what comes back to you

Were talking about the MONEY that comes

back to you

Return so simple

Why do we measure ROI?

Because all return is not created equally

Its a measurement of efficiency

Basis of comparison between different Investments
Measures the amount of return relative to an
investments cost

Return on Investment

ROI =

Gain from Investment Cost of Investment

Cost of Investment

The ROI Formula

Measured as a percentage (%)

Can be used to quickly and easily compare
different Investment options

How to use it

Does not take into consideration time; how long it

takes to earn the return.

Does not take into consideration the relative risk

needed to earn the return

Rate of Return pertains to a specific time

Net Present Value (NPV) takes into consideration the
cost of capital and the time value of money
Internal Rate of Return (IRR) finds the return where the
NPV of all cash flows is equal to zero
Paypack Period calculates how long it takes to get your
initial investment back

Volatility and probability of return

There is no single, right calculation

Can adjust what gets included in Cost of Investment

Real Estate Carrying Costs v. Purchase and Sale Price

Limitations of ROI

Calculate the ROI of a marketing campaign by

comparing the gross revenue generated by the
campaign against the cost of the campaign
An investor may divide the net income of an
investment by the total value of all resources
that have been employed to make and sell the
product
Know the inputs to interpret the result

Different ROI Uses

Is it possible to make toast in a microwave?

Would the ocean be deeper if sponges didnt live
there?
Why is the alphabet in the order that it is?
Why did Yankee Doodle name the feather in his hat
Macaroni?
Why dont you ever see ads for advertising
companies?
Why do superheroes wear underwear on the
outside?
Why cant we spell creativity any way we want?

Questions