In various economic sources, you may come across such abbreviations: ROI and ROR. It's about financial performance. In the first case, there is a return on investment or return on investment ratio. In the second case, the rate of return. This indicator is used to denote the degree of profitability or unprofitability of an investment project.
In Russian-language literature, these indicators may have other names. In particular, they can be called return on invested funds, rate of return, rate of return on invested capital.
Every successful investor pays a lot of attention to ROI. Understanding the specific values of the return on investment allows, if necessary, to make timely adjustments and changes to the corresponding investment project. This leads to an increase in the efficiency of the investor's professional activity.
The ROI coefficient is usually expressed as a percentage. In a situation where it is more than 100%, an investor can invest in the analyzed investment project, since its profitability is considered proven. When the indicator is less than 100%, then there is a high probability that the invested capital will not be able to recoup.
When calculating ROI, as a rule, the following data is used:
- the cost of goods or services produced, which consists of total production costs. We are talking about the purchase of raw materials, logistics costs, wages of employees of the enterprise;
- the value of the total income, from which the cost price is not deducted;
- income, which is the final profit earned from the sale of specific goods or services;
- the amount of investments, consisting of the total costs spent on the implementation of the relevant project.
There are several formulas for calculating ROI. The simplest of them is:
As we wrote above, a kind of watershed, the point of profitability and return on investment is the result equal to 100%. A larger value will predict the profitability of the investment project, a smaller value - unprofitability.
In practice, many successful investors are accustomed to calculating the return on investment on a monthly basis. This approach ensures that the existing dynamics of return on investment is tracked and, therefore, helps to get the most complete and objective picture of what is happening.
In what areas is it appropriate to apply?
ROI allows you to calculate the return on almost all possible types of capital investment. At the same time, there are individual exceptions to this rule.
The return on investment indicator allows you to analyze the following areas: direct marketing, sales promotion, customer loyalty programs and others.
Difficulties begin when calculating ROI, when the analyzed marketing event is complex and cannot be correctly divided into its component parts. In addition, it is impossible to calculate the cost of marketing research.
ROIC
In its full form, it is called Return on Invested Capital. Translated into Russian, this means return on investment. This ratio is used in the analysis of financial statements in order to assess the profitability of the company.
The value of ROIC shows the degree of efficiency of investing capital in the main activity of an economic entity. The value of this indicator allows you to determine the level of return received on capital that was contributed by external investors.
In other words, we are dealing with the actual return on the money invested in the investment project.
Formulas for calculation
ROIC is a kind of indicator that reflects the success of the company's activities for the reporting period, which is the subject of the current analysis. Potential investors are especially interested in its correct calculation.
There are two options for calculating this indicator. In the first case:
In the second case:
In order for the calculations to be correct, an important point must be taken into account. Net operating income should be considered net of adjusted taxes.
During the calculation of this indicator, data must be taken from the annual or quarterly income statement, depending on the specific goals of the person conducting the analysis.
What is it used for?
ROIC is used as an indicator that indicates the ability of a particular enterprise to generate added value in comparison with competitors. On the one hand, if the level of the indicator is high enough, then this is considered to be evidence of professional and competent management. On the other hand, a high value of this coefficient may mean that the head of the business is focused only on the full squeezing out of profit. In this case, profitability is sacrificed, the possibility of growth and development of the enterprise.
Thus, you and I understand that the return on investment ratio is only an indirect expression of the real value of the enterprise.
To determine which of the advertising channels brings you the most profit, and which of them is unprofitable, you need to constantly keep track of advertising costs. But it’s not enough just to know how much you spent on a particular channel - it’s important to understand whether investments in it pay off. You may be paying, but sales from this channel do not even recoup the amount invested in it.
ROI is an abbreviation, from English- return on investment. This is a coefficient that shows the return on investment in a particular project (including advertising). It is usually expressed as a percentage, less often you can find its expression in the form of a fraction.
A good indicator isROI 20% . If this indicator is more than 1000%, this illustrates a huge success.
Let's say a friend comes to you who opens a startup and asks for 100,000 rubles as an investment. A year later, he returns you 150,000. In this case, you not only got your money back, but also earned a little.
- the cost of goods;
- resulting income;
- amount of investment.
ROI is used primarily in those types of business where we are talking about investments, investing money in something - for example, start-ups.
If we are talking about investments in advertising, then it is more correct to call this indicator ROMI - return on investment in marketing, that is, return on investment in marketing. The fact is that in this case it is considered according to a simple formula, without taking into account the costs, for example, for logistics, and so on.
The formula for calculating the return on investment in advertising and marketing
Each business modifies formulas for calculating ROI for itself. There are many of them, but we will focus on the most basic ones.
The simplest and most common formula for calculating ROI is as follows:
Income refers to the income generated from advertising activities. That is, the purchases of those customers who came to you precisely thanks to advertising. Modern analytics systems make it easy to track and calculate this data.
Another version of this formula:
ROI= (revenue-cost)/amount of investment*100%.
This formula is often used to calculate.
With the help of ROI, you can understand how long the investment in a particular project will pay off. The simplest formula is to divide the start-up cost by the average annual cash flow he receives. It is best suited for calculating the payback of a startup.
ROI (per period) = (number of investments by the end of the period + income for the period - size of investments) / size of investments.
But most often it is the first formula that is used - it is flexible and very simple. It can be used to calculate the return on investment:
- in internet marketing entirely;
- in a separate advertising channel (for example, in);
- into a separate high-margin product;
- for a new product category, and much more.
Let's try to apply this formula and calculate ROI for different advertising channels.
Calculation examples
Let's analyze the situation. You have an online store and three advertising channels: SEO, contextual advertising and social networks.
During the first month, you conducted an analysis and saw that (the numbers are approximate and far from reality :)):
Now we calculate the ROI for each individual channel.
SEO ROI=(7000-5000)/5000*100%=40%.
ROI SMM=(5000-3000)/3000*100%=67% (round up).
ROI PPC=(25000-10000)/10000*100%=150%.
As a result, we see a very interesting picture. If we compare search promotion and social networks, then at first it seemed that SEO was more profitable. And more customers came from there, and the income is also higher. But if we calculate ROI, then SMM turned out to be more profitable, here we returned more investments. If you pay attention to the average bill, then everything becomes clearer - we got better customers from social networks.
Contextual advertising paid off best - hereROI 150%, and there are the most customers from this channel. But pay attention to the average check: 25,000/100=250 rubles, while one client from social networks brings us 1,000 rubles.
In this case, you need to think about how to increase investment in SMM, and how to encourage customers coming from contextual advertising to buy more. Perhaps you need to rethink your advertising strategy, ads or landing pages.
To do this, you need to dig deeper. But even a simple calculation of the effectiveness of each channel has already shown which one is more effective, and which one is not yet working at full capacity. Although all of them pay off - and that's good.
Try this way to check your advertising channels. Many things may surprise you.
Hello everyone!
Any entrepreneur must understand what the result of his monetary investment in something is: whether it is advertising or the purchase of new equipment that would reduce the cost of the product. To understand this, it is enough to use the ROI formula, which will show how efficiently any other traffic channel, or something else, in which you have invested, works.
ROI (Return On Investment) is a measure of return on investment. There are several varieties of this indicator, but we are only interested in one - marketing ROI, or to be more precise, ROMI (Return On Marketing Investment).
To calculate the ROI formula, we need the following data:
- Income. What you have earned from the sale;
- Cost price. The sum of all costs for the production of the product, its transportation and others;
- Investments. How much money you have invested in a particular advertising channel.
Let's get down to business.
ROI - calculation formula
ROI = (Income - Investment Amount) / Investment Amount * 100%
Using it, an Internet marketer can understand how effectively an advertising campaign (AC) is working. After all, the profit from the AC is what any advertiser strives for, and all other indicators such as CTR do not play any role at all.
The above is one of the varieties of ROI, but you can also calculate the return on investment, taking into account the cost of the product:
ROI = (Revenue - Product Cost) / Investment Amount * 100%
Now you will see both your real profit and how the advertising campaign pays off.
ROI Calculation Example
Let's move on from theory to practical actions. Let's imagine that you use three advertising channels:
- . You spend 15,000 rubles / month on it;
- . Here you invest 15,000 rubles / month.
At the same time, sales per month reach 50 orders, and each channel brings the following number of orders:
- Yandex.Direct — 18 orders;
- Google Adwords - 15 orders;
- Advertising in social networks - 17 orders.
One order brings us 2,500 rubles of net profit, taking into account all expenses. From here it turns out that each channel brings in a month:
- 45000;
- 37500;
- 42 500.
Based on these data, we will make the following calculation for Yandex.Direct:
ROI = (45000 - 15000) / 15000 * 100 = 200%
The ROI for this channel is 200%. This means that 1 ruble invested in Direct brings us 2 rubles.
For all other channels, the results are as follows:
- Google Adwords - 150%;
- Advertising in social networks - 183%.
What do the numbers tell us? And they tell us that Yandex.Direct, with an equal budget with other channels, is more profitable, therefore, we can safely increase the budget for this channel, from which we will only benefit.
When calculating this indicator, it is important to remember one thing: the higher the ROI, the better. So if the return on investment is< 100%, значит вложенные деньги не окупаются должным образом при использовании определенного рекламного канала. Но в нашем примере, получается, что все каналы окупаются, но самый эффективный из них — Яндекс.Директ.
What to do with campaigns based on this data?
Based on the data obtained, using the ROI formula, we can do the following things:
- Adjust the advertising budget - increase or vice versa decrease;
- Adjust cost per click;
- Expand Used
One of the main points in investments is the assessment of the profitability of investments in a particular asset. You can calculate the profitability in different ways, often this is done directly in the brokerage report. In this article, we will talk about the calculation using the very popular Return on Investment (ROI) ratio.
So, ROI is often used to evaluate the effectiveness of investment investments. It is most often translated as “return on investment”, although the terms “return on investment”, “rate of return” and others are sometimes found.
This coefficient is widely used due to its simplicity and versatility. But there is one important nuance: it is imperative to understand who uses this coefficient and for what, because there are two common variations of it:
- ROI as a tool for comparing different assets in a portfolio
- ROI as an indicator of the effectiveness of the management of a particular company
For example, you can see this picture:
As you can see, in this case we are talking about the ROI of various asset classes over a certain period of time. It can be seen that over the period from 2000 to 2010, the ROI of investments in US stocks fell, while the ROI of investments in real estate, on the contrary, increased markedly.
Or take the example of General Electric for one of the previous periods:
Here, ROI is given as an indicator of the effectiveness of General Electric's management and shows that the return on investment for the reporting period was 2.98%. The formula for calculating ROI will be given below.
Important footnote : it should be remembered that there is also ROI as a marketing indicator in IT (the most common in terms of the popularity of queries in search engines), reflecting the effectiveness of advertising campaigns. In order to avoid confusion in this case, they sometimes talk about the ROMI (Return on Marketing Investment) ratio, but not always.
ROI as a tool for comparing returns
The meaning of the ROI ratio is simple: it is the net income received from an investment (including its sale) relative to the cost of its acquisition. It is usually calculated and given as a percentage.
Formula: Net Income / Investment Value
Example: let's say you bought a share for 100 rubles, received 10% dividend (10 rubles), and sold it for 120 rubles.
Then the ROI of the investment will be: [(120 + 10) - 100] / 100 = 30%
It is clear that if the sale price were, say, 80 rubles, then the investment would be unprofitable and the ROI would mathematically turn out to be negative. Using this ratio, you can very quickly assess which instruments in the portfolio bring more income.
In addition, the versatility of the ratio allows it to be used to compare a variety of investments, including those belonging to different classes: stocks, bonds, mutual funds, real estate, direct investment in business, etc. For example, the operation of renting an apartment will be profitable if the rent is higher than the monthly mortgage payment. Multiplying the difference by 12 and dividing by the initial mortgage payment, we get the numerical value of the coefficient.
Difficulties and mistakes
Most often, ROI is used to compare the effectiveness of investments already made, that is, when you already have a reliable selling price, or the current price at which you can sell. When evaluating the ROI of an investment that has not yet been made, it becomes necessary to assume what the future sale price of the investment will be and, thus, to make adjustments for potential changes in the future value, which already distorts the original meaning of the coefficient. In this case, the use of other coefficients (for example, profitability) looks more justified.
The formula itself does not take into account the holding time of the investment. Therefore, in order to use it for assets with different holding periods, an additional adjustment must be made. For example, if the portfolio contains stock A with a holding period of 2 years and an ROI of 30%, and stock B with a holding period of 1 year and an ROI of 10%, then for comparison you need to divide the ROI of stock A by 2.
The most common mistake is not to take into account various additional costs, such as transaction costs and taxes, when calculating the value of an investment. When calculating the ROI for real estate investments, one should not forget about the inclusion of commission brokers, operating costs, tax payments, etc. in the cost of the investment.
What ROI is considered good
If the ROI of an investment exceeds the average return for a given asset class in a given country, then the investment is traditionally considered highly profitable.
For example, the historical return on investment in US stocks included in the S & P500 index is about 8-12% per year (depending on which time period to take). The return on investment in Warren Buffett's stock has exceeded 15% per year throughout its existence. Thus, if the portfolio contains a share of the notional Amazon and its ROI over the period of ownership is 15% per year, then it can be considered a good investment in terms of profitability.
ROI as an indicator of management effectiveness
There are three traditional metrics that measure management effectiveness:
- Return on equity (ROE) - return on equity of the company
- Return on assets (ROA) - return on assets
- Return on Investment (ROI) - return on investment
Often they are considered together, as, for example, in the attached picture.
Here are the current odds for Microsoft from csimarket.com. There you can also compare these coefficients with indicators in the industry:
Let's take a closer look at ROI. In this case, it can be seen that management is more efficient than companies in the S&P500 index, but less than in the sector of companies similar to Microsoft.
ROI calculation formula: Net profit / long-term investment * 100%
Net profit is usually taken over the last twelve months (TTM - trailing twelve months). Long-term investments are, respectively, the sum of long-term liabilities and capital of the company.
The general meaning of the ROI ratio is how well management manages long-term investments, whether they give a return, and whether the company's growth is organic.
Difficulties and disadvantages
The main claim to ROI, as well as to indicators based on financial statements in general, is their great dependence on accounting rules. Not only are these rules different in different countries, they can differ even in companies operating in the same country (GAAP standard and IFRS standard, for example).
As a result, a sharp change in net profit and a change in ROI in one of the reporting periods can only mean accounting manipulation. Therefore, it is advisable to average ROI and other management performance indicators and use them only as an additional argument and only if the investment horizon exceeds several years.
It should be taken into account that ROI reflects only the past and does not predict the future - future returns can be equally likely higher, the same or lower than those calculated on history.
What ROI is considered good
Here's what the actual average ROI in different sectors of the US economy looks like:
How can this be useful to an investor? If the company in question has an ROI above or below the industry average, then an active invester can buy an undervalued stock with a low return, or sell an expensive one - if it comes from a return to the average. ROA, ROE and ROI ratios can also be found on the finviz.com website by selecting the "Screener" menu and then "Financial". However, at the same time, different sites for ROI may have different values, which is probably due to different accounting standards that are used in the assessment:
