"Return on investment" is a financial calculation used to gauge how well the money you invest earns you even more money. To calculate ROI you divide the earnings you made from an investment by the amount you invested. For instance, if your company spends $100,000 purchasing a product that earns you an additional $20,000 after a year, your ROI is 0.2 or 20 percent. You can automate your ROI calculations for products or other types of investments by creating a simple, reusable Excel spreadsheet. Show
In this lesson, you will learn how to calculate ROI in Excel. ROI stands for return on investment. Return on investment is one of the most basic measures in business. A ROI is a profitability indicator that is used to measure the efficiency of a company, regardless of the structure of its assets or
extraordinary factors. Return on investment is also helpful for project managers because it helps them calculate the efficiency of the project. Let's build the return on investment calculator in Excel. To calculate ROI in Excel, first you need some data. You require a net profit and the cost of the investment. Copy and paste this ROI formula into cell B4: =B2/B3 This formula will calculate the ROI for the investment data you place in cells B2 and C2 and is based on the ROI equation formula: ROI = Net Profit / Investment Cost In other words, the ROI is simply the return on the amount invested, so the equation can be written alternatively like this: ROI = (Present Value - Starting Value) / Starting Value Remember to format the ROI as a percentage. Click on the B4 cell > CTRL + 1 keyboard shortcut > Percentage with 2 decimal places.  The result is greater than 0, so this is the profit from an investment, which is 7.34%. When the result is below zero, it is a loss. Things to rememberRemember that the return on investment result does not take into account a few important aspects that you should be aware of. Typically, the return on investment is calculated as the market value of the investment divided by its initial value. Market value does not mean that it is the amount of cash that you are currently getting. In fact, you may find that the cash you are able to get is lower. You should also consider the time it takes to cash in your investment, which can be long. Return on investment is the ratio of the present value to the initial value without accounting for inflation, taxes, costs of obtaining capital or risk. The low value of the return on investment may not compensate for the risk premium or may be lower than inflation. It is recommended to calculate the annual return on investment and compound annual growth rate as well, which can give you more information about the true success of your investment. Download a free sample spreadsheet here. Further reading: How to calculate ROE? How to calculate ROA? How to calculate ROCE? How to calculate ROIC?
Guide to Understanding Return on Investment (ROI) The ROI, an abbreviation for “return on investment”, measures the profitability of an investment by comparing the net profits received at exit to the original cost of the investment. Table of Contents
How to Calculate ROI (Step-by-Step)ROI stands for the “return on investment”, and is defined as the ratio between:
The return on investment formula is straightforward, as the calculation simply involves dividing the net return on the investment by the investment’s corresponding cost. In particular, the ROI is most commonly used for internal purposes within companies, such as for their decision-making processes regarding which projects to pursue and for decisions on how best to allocate their capital. The higher the ROI on a project or investment, the greater the monetary benefits received — all else being equal. However, what constitutes whether the ROI is adequate differs based on the target return specific to the investor and the length of the holding period, among other factors. ROI FormulaThe formula for calculating the return on investment is as follows. ROI = (Gross Return – Cost of Investment) ÷ Cost of Investment ROI = Net Return ÷ Cost of Investment For purposes of comparability, the return on investment metric is typically expressed in percentage form, so the resulting value from the above formula must then be multiplied by 100. The numerator in the formula, the return, represents the “net” return — meaning that the cost of the investment must be subtracted from either 1) the gross returns or 2) the total exit proceeds. For example, if the gross return on an investment is $100k while the associated cost was $80k, the net return is $20k. With that said, the return on investment can be calculated by dividing the $20k net return by the cost of $80k, which comes out to 25%.
How to Interpret Return on Investment (ROI)The return on investment is a widespread metric due to its simplicity since only two inputs are necessary:
However, one drawback is that the “time value of money” is neglected, i.e. a dollar received today in worth more than a dollar received in the future. If there are two investments with the same return, yet the second investment requires twice the amount of time until it is realized, the ROI metric on its own fails to capture this important distinction. Therefore, when making comparisons among different investments, investors must ensure the time frame is the same (or nearby) or otherwise remain cognizant of the timing discrepancies between investments when putting together rankings. One variation of the metric is called the annualized return on investment, which adjusts the metric for differences in timing. Annualized ROI = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1 Furthermore, a common mistake in calculating the metric is neglecting side expenses, which tends to be more applicable to projects in corporate finance. The ROI calculation must factor in each and every profit and incurred cost associated with the project (e.g. unexpected maintenance fees) and investments (e.g. dividends, interest). ROI Calculator — Excel Model TemplateWe’ll now move to a modeling exercise, which you can access by filling out the form below. Return on Investment Calculation ExampleSuppose an industrial company spent $50 million of capital expenditures (CapEx) to invest in new machinery and upgrade their factory. By the end of the anticipated holding period – which in the context of a company purchasing fixed assets is the end of the PP&E’s useful life assumption – the company received $75 million. The net return on the PP&E investment is equal to the gross return minus the cost of investment.
The net return of $25 million is then divided by the cost of investment to arrive at the return on investment (ROI).
Given the $50 million net return and $25 million cost of investment, the ROI is 50%, as shown in the screenshot below. Equity Investment ROI Example CalculationIn the next example scenario, a hedge fund has purchased shares in a publicly-traded company. On the date of the purchase, the company was trading at $10.00 and the hedge fund bought a total of 4 million shares. Thus, the cost of investment to the hedge fund comes out to $40 million.
Five years from the date of purchase, the hedge fund exits the investment – i.e. liquidates its position – when the shares are up 20% relative to the entry share price at $12.00 per share. If we assume that 100% of their equity stake is sold, the total proceeds post-sale are $48 million.
The net return comes out to $8m, which is the difference between the total proceeds from the sale ($48m) and the cost of investment ($40m). The ROI on the hedge fund’s investment is therefore 20%. Since we are given the holding period of the hedge fund in this particular investment (i.e. 5 years), the annualized ROI can also be calculated. To calculate the annualized ROI, we’ll use the “RATE” function in Excel:
Alternatively, we could have divided the total sale proceeds by the cost of investment, raised it to the power of (1/5), and subtracted 1 – which also comes out to 3.7%, confirming our earlier calculation is correct. Step-by-Step Online Course Everything You Need To Master Financial ModelingEnroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks. Enroll Today How do I create ROI in Excel?This is displayed as a percentage, and the calculation would be: ROI = (Ending value / Starting value) ^ (1 / Number of years) -1. To figure out the number of years, you'd subtract your starting date from your ending date, then divide by 365.
Does Excel have an ROI formula?Enter the ROI Formula
The ROI formula divides the amount of gain or loss by the content investment. To show this in Excel, type =C2/A2 in cell D2.
How do I make a ROI model?ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
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How do I create a ROI model in Excel?
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