- (net income/ initial investment)* 100
- (gross profit / initial investment)* 100
- (net income/revenue)* 100
- (net income/cogs)* 100
Out of the options you provided, the most common formula for calculating ROI (Return on Investment) is:
(Net Income / Initial Investment) * 100
Here’s a breakdown of why this formula is preferred:
- Net Income: This represents the actual profit earned after accounting for all expenses. It’s a more accurate picture of the investment’s performance.
- Initial Investment: This reflects the total cost incurred at the beginning of the investment.
Dividing net income by the initial investment gives you a ratio. Multiplying by 100 expresses this ratio as a percentage, making it easier to interpret the ROI.
The other formulas you listed have limitations:
- Gross Profit / Initial Investment: This uses gross profit, which doesn’t consider operating expenses. It can overestimate the actual return.
- Net Income / Revenue: This doesn’t account for the initial investment. While it can be a profitability metric, it’s not ROI.
- Net Income / COGS (Cost of Goods Sold): This is similar to gross profit and doesn’t consider all expenses.
While ROI is a valuable tool, it’s important to remember it has limitations. It doesn’t factor in the time value of money or the risk involved in the investment