Guru says: The purpose of ROI is to ensure you are not loosing money!
As an Investor of any vehicle, ROI is the King of Calculation & It helps in Decision Making & Measuring Success. Let us have a more understanding of ROI.
Return on Investment (ROI)
ROI can be applied to any Type of Investments & Compare models as well.
- Stock Market
- Real Estate
- Business Evaluations
Note This ROI Calculation is part of Essential Training of 3Y Multibagger Plan which I found most people are lacking in Identifying their Capital Allocation for stocks – hence I thought of sharing it to the public.
Simple Example of ROI
Let us take a Simple Example of ROI on Fixed Deposits.
- A normal bank FD gives 8% ROI
- A high-rated corporate FD gives 12% ROI
So we are getting the Base ROI as 10% without doing any activities.
Risk:Reward Ratio
Here the Risk is 0% and Reward is 10%!
More Complex Example of ROI
Now let us take an Example of Calculating ROI on a business. Your cousin come up with a Plan to do a Rental Business with:
- Capital Expenditure of 10 Lakhs
- Yearly Expense of 3 Lakhs
- Yearly Depreciation of 1 Lakhs
- Yearly Income of 5 Lakhs
The Total ROI of the business would be: 10%
Decision Making Now will you do this business? I would say No because the ROI is just 10% which you can get without doing any activities from FDs.
ROI on Stocks
Now let us calculate ROI on our Core Investing which is Stocks! Have you ever thought what is your ROI on portfolio? If not you are not doing right!
ROI on stocks are calculated as following:
- Capital Gain + Dividend Gain
For an example, You calculated a Stock with 30% Price Growth possibilities. So your ROI will be 30% every year!
Question: Will you Invest in stocks for 30%?
If your answer is Yes, I would say No because you have not considered the Risk Factor of Stock Market! Your stock can go bankrupt too & thus ROI 30% is not worth for Stocks.
- Here the Risk is 100%
- Here the Reward is 30%
Now you will ask me Why I am invested in stocks? The answer is Portfolio Theory. As you add more & more stocks the portfolio the chance of whole portfolio going 0 is less. Thus I invest in a Portfolio of Stocks!
ROI on Real Estate
For ROI calculation on Real Estate – for Investment purpose like Plot, House, Flat – you have to Calculate the Rental Yield + Appreciation.
Example: Your Broker advised to Buy a 1000 sqft Flat by a Reputed Builder selling at Rs. 1 Crore. If the Rent on same area is Rs. 15 Thousand per month, the ROI will be around 2%! Here you will need atleast 10% Appreciation to stay Profitable than FD returns.
If you purchased the Flat on Loan, then ROI will further deplete.
On moderate grounds, Most of the Real Estate Flat/House Investments are Lossy due to the Premium Price set by the builders!
This is why the Builders are getting Rich & Not the Investor!
Note: For simplicity we have avoided Inflation, Taxes, Loan etc. from All the Calculations
Tool: You can use our Calculator here.
More Calculations
More Calculations on ROI is possible – you can perform the following & post as comments:
- Calculate the ROI on your College Education. How much you spent for entire Education in 3-4 years? How much ROI you made on each year of work?
- You are going to hire an employee who will do Digital Marketing work for you. The yearly expense would be Rs. 2 Lakh & the guaranteed Revenue Increase is Rs 3 Lakh. Will you hire?
- You wanted to make a decision on Buying a Petrol Car vs Diesel Car. Find the prices of Petrol Model, Diesel Model & Forecast the Fuel Cost savings offsetted with the Maintenance cost. Find ROI on the price difference. Which one you will buy?
- Visit a nearby Shop/Restaurant. Calculate the Capital Investment, Expenses & ROI. Is it worth them to run the business OR put money in FD?
Summary
In this post you have learned basics of ROI, Risk:Reward ratio, Decision Making & Comparison – all with Real World examples. I hope this will be helpful for you to become a Value oriented Investor.
All great investors like Warren Buffet, Robert Kiyosaki, Peter Lynch are so Masters in ROI Calculations! You too start practicing on same – Keep a mind exercise on whatever business you see to identify the ROI eg: hotels, taxi, swiggy, rental house etc.
Note If you are a new investor & would like to gain more exercise on ROI then join our Subscriber Group & Reap Ultimate profits of 10X in 10Years. We are going to Release next Page Industries like Multibagger which is at Discount in this Bear Run period Don’t Wait – Subscribe!
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