Return on investment shows how much money is made on an investment compared to how much was spent on it. It is expressed as a percentage. The formula for calculating return on investment is: gain from the investment minus the cost of the investment, divided by the cost of the investment. Calculating return on investment is useful when comparing investments. For example, if Investment A cost $1,000 and had a gain of $500 and Investment B cost $100 and had a gain of $60, then Investment B had a higher return on investment at 60 percent.
Step 1
Determine the gain on the investment and the cost of the investment. For example, an investment cost an investor $500 and the investment was worth $520 at the end of the year. In business, an analysis of investment costs and gains are presented on the firm's financial statements, usually on the income statement and balance sheet.
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Step 2
Subtract the investment's ending value from the cost of the investment to determine net profit. In the example, $520 minus $500 equals $20.
Step 3
Divide the net profit by the cost of the investment. In the example, $20 divided by $500 equals 0.04, or a 4 percent return on investment.
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