8 views

Original Title: Capitalization of Earnings

Uploaded by netra14520

- System Analysis and Design Assigment
- Leather Goods
- CMAPart3D(Behavioural Issues)194
- Divisional Performance Management
- Financial Ratios
- anintroductiontoinvestment-111212040615-phpapp02
- Formula Sheet Exam 1 FIN 431
- memo
- Measuring Portfolio Mean Performance - Cash Flows and Approximation Methods
- Real Estate Investing
- Social Security: v63n2p38
- soln_ch_26_portf_mgt
- Statistics- Quantitative Business Decisions
- Lecture Note 1
- FundManagerReport-Feb2019.pdf
- Ech158a Lecture 6-Humg 2019
- Answers to Tutorial 4
- Summary of Chapter 3 Fundamental Interpretations Made From Financial Statements Data of Accounting
- Fresh Facts Oct/Nov 2015
- Calculating ROI for a Hospital Implementing Smart Assets With Physical Tracking and Barcoding

You are on page 1of 8

You May Also Like: Learn to trade stocks with virtual money before you risk your own...

HowToCalculateReturnOnInvestment(ROI)

A performance measure used to evaluate the efficiency of an investment or

to compare the efficiency of a number of different investments. ROI

measures the amount of return on an investment relative to the investments

cost.. To calculate ROI, the benefit (or return) of an investment is divided by

cost

the cost of the investment, and the result is expressed as a percentage or a

ratio.

The return on investment formula:

PROMOTE CONTENT ON TIMES OF INDIA NETWORK

SPONSORED BY COLOMBIA

00:00 01:31

obtained from the sale of the investment of interest. Because ROI is

measured as a percentage, it can be easily compared with returns from other investments, allowing

one to measure a variety of types of investments against one another.

Return on investment is a very popular metric because of its versatility and simplicity. Essentially,

return on investment can be used as a rudimentary gauge of an investments profitability. ROI can

be very easy to calculate and to interpret and can apply to a wide variety of kinds of investments.

That is, if an investment does not have a positive ROI, or if an investor has other opportunities

available with a higher ROI, then these ROI values can instruct him or her as to which investments

are preferable to others.

For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2010 and sold his shares for a total

of $1,200 a year later. To calculate the return on his investment, he would divide his profits ($1,200 -

$1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%.

With this information, he could compare the profitability of his investment in Slice Pizza with that of

other investments. Suppose Joe also invested $2,000 in Big-Sale Stores Inc. in 2011 and sold his

shares for a total of $2,800 in 2014. The ROI on Joes holdings in Big-Sale would be $800/$2,000, or

40%. Using ROI, Joe can easily compare the profitability of these two investments. Joes 40% ROI

from his Big-Sale holdings is twice as large as his 20% ROI from his Slice holdings, so it would appear

that his investment in Big-Sale was the wiser move.

Limitations of ROI

Yet, examples like Joe's reveal one of several limitations of using ROI, particularly when comparing

investments. While the ROI of Joes second investment was twice that of his first investment, the

time between Joes purchase and sale was one year for his first investment and three years for his

second. Joes ROI for his first investment was 20% in one year and his ROI for his second investment

was 40% over three. If one considers that the duration of Joes second investment was three times

as long as that of his first, it becomes apparent that Joe should have questioned his conclusion that

his second investment was the more profitable one. When comparing these two investments on an

annual basis, Joe needed to adjust the ROI of his multi-year investment accordingly. Since his total

ROI was 40%, to obtain his average annual ROI he would need to divide his ROI by the duration of his

investment. Since 40% divided by 3 is 13.33%, it appears that his previous conclusion was incorrect.

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 1/8

1/28/2017 CapitalizationOfEarnings

While Joes second investment earned him more profit than did the first, his first investment was

actually the more profitable choice since its annual ROI was higher.

Examples like Joes indicate how a cursory comparison of investments using ROI can lead one to

make incorrect conclusions about their profitability. Given that ROI does not inherently account for

the amount of time during which the investment in question is taking place, this metric can often be

used in conjunction with Rate of Return,

Return, which necessarily pertains to a specified period of time,

unlike ROI. One may also incorporate Net Present Value (NPV),

(NPV), which accounts for differences in the

value of money over time due to inflation, for even more precise ROI calculations. The application of

NPV when calculating rate of return is often called the Real Rate of Return.

Return.

Keep in mind that the means of calculating a return on investment and, therefore, its definition as

well, can be modified to suit the situation. it all depends on what one includes as returns and costs.

The definition of the term in the broadest sense simply attempts to measure the profitability of an

investment and, as such, there is no one "right" calculation.

For example, a marketer may compare two different products by dividing the gross profit that each

product has generated by its associated marketing expenses

expenses.. A financial analyst, however, may

compare the same two products using an entirely different ROI calculation, perhaps by dividing the

net income of an investment by the total value of all resources that have been employed to make

and sell the product. When using ROI to assess real estate investments

investments,, one might use the initial

purchase price of a property as the Cost of Investment and the ultimate sale price as the Gain

from Investment, though this fails to account for all of the intermediary costs, like renovations,

property taxes and real estate agent fees.

This flexibility, then, reveals another limitation of using ROI, as ROI calculations can be easily

manipulated to suit the user's purposes, and the results can be expressed in many different ways. As

such, when using this metric, the savvy investor would do well to make sure he or she understands

which inputs are being used. A return on investment ratio alone can paint a picture that looks quite

different from what one might call an accurate ROI calculationone incorporating every relevant

expense that has gone into the maintenance and development of an investment over the period of

time in questionand investors should always be sure to consider the bigger picture.

Developments in ROI

Recently, certain investors and businesses have taken an interest in the development of a new form

of the ROI metric, called "Social

"Social Return on Investment,"or

Investment,"or SROI. SROI was initially developed in the

early 00's and takes into account social impacts of projects and strives to include those affected by

these decisions in the planning of allocation of capital and other resources.

see:FYI on ROI: A Guide to Calculating Return on Investment.

Investment.

If the markets are in a free fall you want to be able to profit when everyone else is losing their shirt.

You need to learn everything you need to know about short selling by signing up for our free 8-week

email course. Learn what a short sell is, what the risks are and how you can use them to profit on

declining stocks. So sign up today and start looking at every movement as an opportunity to make

money.

Trading Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 2/8

1/28/2017 CapitalizationOfEarnings

Capitalization Of Earnings

SHARE

You May Also Like: Sign up for our free News to Use newsletter to receive the latest market

insights in your inbox every morning...

net present value (NPV) of expected future profits or cash flows.

flows. The capitalization of earnings

estimate is determined by taking the entity's future earnings and dividing them by the capitalization

rate (cap rate). This is an income-valuation approach that determines the value of a business by

looking at the current cash flow,

flow, the annual rate of return and the expected value of the business.

Where:

d = discount rate

g = growth rate

The capitalization of earnings approach helps investors determine the potential risks and return of

purchasing one company rather than another to decide which may offer the best value for the

investor's money. For example, imagine a small business has been bringing in $500,000 annually for

the past decade and most likely should continue to do so. The business pays $100,000 annually in

expenses. Therefore, the business earns $400,000 annually ($500,000 - $100,000 = $400,000.)

Because the company should retain its value, a buyer is most likely able to sell it for the same price

as what he paid. The buyer could then compare this low-risk investment earning $400,000 annually

to other ways he may earn the same amount. For example, he may invest in a treasury bill paying

6% annually. To earn the same $400,000 per year, the buyer has to invest approximately $6.7 million

in treasury bills (6,700,000 x 6% = $402,000.) Using this valuation, the small business is worth about

$6.7 million.

Because business equipment typicallyTopics Reference

depreciates Advisors

over time and Markets

business owners Simulator

have various

expenses and risks, the higher the perceived risk, the higher the capitalization rate that is used in

determining a companys value. Rates typically used for small businesses are 20% to 25%, which is Search news, tickers, terms Newsletters

the return on investment (ROI) buyers typically look for when deciding which company to purchase.

Read More +

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 3/8

1/28/2017 CapitalizationOfEarnings

Return

SHARE

You May Also Like: Learn to trade stocks with virtual money before you risk your own...

Video Definition

A return is the gain or loss of a security in a particular period. The return consists of the income and

the capital gains relative on an investment, and it is usually quoted as a percentage. The general rule

is that the more risk you take, the greater the potential for higher returns and losses.

Return is also used as an abbreviation for income tax return see 1040 Form.

Form.

NEXT UP

UP:: RETURN

BREAKING DOWN 'Return'

While some investors will settle for principal protection, most investors are in search of return,

Return On Investment

specifically Topics

- ROI Alpha returns

alpha returns. Reference

are generated when anAdvisors Markets moreSimulator

investment generates money

than it costs. In general, there are three different types of return measures: return on investment,

investment,

return on equity and return on assets. Each one is essentially calculated the same way, but the Search news, tickers, terms Newsletters

Capitalization Of Earnings

inputs have different labels.

Return

Read More +

Investment Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 4/8

1/28/2017 CapitalizationOfEarnings

Average Return

Cash-On-Cash Return

Pig

Investing

Asset Redeployment

Opportunity Cost

Investment Center

SHARE

You May Also Like: Sign up to our free Retirement newsletter for the latest retirement planning

advice, social security tips, and more...

A business unit that can utilize capital to directly contribute to a company's profitability. Companies

evaluate the performance of an investment center according to the revenues it brings in through

investments in capital assets compared to the overall expenses.

An investment center is different than a cost center,

center, which indirectly adds profit and is evaluated

according to the money it takes to operate. Moreover, unlike a profit center,

center, investment centers can

utilize capital in order to purchase other assets. Because of this complexity, companies have to use a

NEXT UP UP:: RETURN

variety of metrics, including return on investment (ROI), residual income and economic value added

(EVA) to evaluate performance.

Return On Investment - ROI Topics Reference Advisors Markets Simulator

Test Your Skills With Trading Challenges

Put your trading skills to the test with our free Stock Simulator. The ideal platform to get your Search news, tickers, terms Newsletters

Capitalization Of Earnings

financial feet wet! Submit trades in a virtual environment before you start risking your own capital.

Click here to sign up today and start interacting with other traders from diverse backgrounds and

Return

experiences, and learn the methods behind their trades to become a better investor.

Investment Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 5/8

1/28/2017 CapitalizationOfEarnings

Average Return

Cash-On-Cash Return

Pig

Investing

Asset Redeployment

Opportunity Cost

Average Return

SHARE

You May Also Like: Learn to trade stocks with virtual money before you risk your own...

Average return is the simple mathematical average of a series of returns generated over a period of

time. An average return is calculated the same way a simple average is calculated for any set of

numbers; the numbers are added together into a single sum, and then the sum is divided by the

count of the numbers in the set. There are many return measures; two of the most popular are

return on assets (ROA) and return on equity (ROE).

One example of average return is the simple mathematical average. For example, suppose an

investment returns the following annual returns over a period of five full years: 10%, 15%, 10%, 0%

and 5%. To calculate the average return for the investment over this five-year period, the five annual

returns are added together and then divided by 5. This produces an annual average return of 8%.

NEXT UP

UP:: RETURN

In business, there are three main ways to calculate return. One way is with a simple growth formula,

Return

whereOn

theInvestment - ROIinvestmentTopics

return on the is a functionReference

of growth. TheAdvisors Marketsof return,

other two measures Simulator

ROA

and ROE, focus on performance rather than growth.

Search news, tickers, terms Newsletters

Capitalization Of Earnings

Read More +

Return

Investment Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 6/8

1/28/2017 CapitalizationOfEarnings

Average Return

Cash-On-Cash Return

Pig

Investing

Asset Redeployment

Opportunity Cost

Cash-On-Cash Return

SHARE

You May Also Like: Submit trades in a virtual environment before you start risking your own

capital...

Video Definition

Cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash

income earned on the cash invested in a property. For example, when an investor purchases a rental

property, she might put down only 10% for a cash down payment.

payment. Cash-on-cash return measures

the annual return the investor made on the property in relation to the down payment only.

Cash-on-cash return is a metric normally used to measure commercial real estate investment

performance. It is sometimes referred to as the cash yield on a property investment. The cash-on-

cash return rate provides business owners and investors with an analysis into the business plan for a

property and the potential cash distributions over the life of the investment.

NEXT

Read UP:

UP

More + : RETURN

Capitalization Of Earnings

Return

Investment Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 7/8

1/28/2017 CapitalizationOfEarnings

Average Return

Cash-On-Cash Return

Pig

Investing

Asset Redeployment

Opportunity Cost

Pig

SHARE

You May Also Like: Learn to trade stocks with virtual money before you risk your own...

An investor who is often seen as greedy, having forgotten his or her original investment strategy to

focus on securing unrealistic future gains. After experiencing a gain, these investors often have very

high expectations about the future prospects of the investment and, therefore, do not sell their

position to realize the gain.

NEXT UP

UP:: RETURN

BREAKING DOWN 'Pig'

Like a pig in the farmyard that overindulges in feed, this type of investor will hold onto an

investment

Return even after

On Investment a substantialTopics

- ROI movement in the hope thatAdvisors

Reference the investment will provideSimulator

Markets even

greater gains.

Capitalization

For example,Of Earnings

suppose Joe invests in XYZ Corp. because the stock is undervalued

undervalued.. After the stock

doubles its price in two months, Joe holds on to the whole investment, hoping that it will double

again in the next two months, instead of selling a portion of the investment to realize a gain. Joe is,

Return

therefore, a piggish investor because he is greedy for huge gains and he allows his greed to

supersede his original value investment strategy.

Investment Center

http://www.investopedia.com/terms/c/capitalization_of_earnings.asp 8/8

- System Analysis and Design AssigmentUploaded byskemuel
- Leather GoodsUploaded byMuhammad Hashi
- CMAPart3D(Behavioural Issues)194Uploaded byOeln Cainglet
- Divisional Performance ManagementUploaded byiishahbaz
- Financial RatiosUploaded bygib999
- anintroductiontoinvestment-111212040615-phpapp02Uploaded byJuvee Lyne Timay
- Formula Sheet Exam 1 FIN 431Uploaded bychocolatedoggy12
- memoUploaded byapi-291076078
- Real Estate InvestingUploaded byRudra Singh
- Measuring Portfolio Mean Performance - Cash Flows and Approximation MethodsUploaded byNina Šarin
- Social Security: v63n2p38Uploaded bySocial Security
- soln_ch_26_portf_mgtUploaded bybabutu123
- Statistics- Quantitative Business DecisionsUploaded byDr Rushen Singh
- Lecture Note 1Uploaded byReckon Indepth
- FundManagerReport-Feb2019.pdfUploaded byAsif Azeem
- Ech158a Lecture 6-Humg 2019Uploaded byTrường Tùng
- Answers to Tutorial 4Uploaded bylkishs
- Summary of Chapter 3 Fundamental Interpretations Made From Financial Statements Data of AccountingUploaded bysg
- Fresh Facts Oct/Nov 2015Uploaded bygjuddy
- Calculating ROI for a Hospital Implementing Smart Assets With Physical Tracking and BarcodingUploaded byTamil Selva
- Chapter Vi Casa BambiniUploaded byJhon Rey Abinion
- Current Ratio (1)Uploaded byGelaAifos
- 5_ROIUploaded byanishghosh
- Agriculture Machinery and Equipment Repairing and Servicing UnitUploaded bySantosh Basnet
- 12-23-11 ROP ADSUploaded byRegisterPublications
- MCS IMP QUESTIONS.docxUploaded byManan Thadeshwar
- BSNL DGM Previous PaperUploaded bywimaxaaabgl
- Conduct Structure and PerformanceUploaded byFatima Sadik
- Gold Trend ETN FactsheetUploaded byjmertz74
- Chap 017Uploaded byMuqadas J. Azizi

- Dietary Reference IntakeUploaded bynetra14520
- DSPP_IBM.pdfUploaded bynetra14520
- Forward Dividend Yield Definition _ Investopedia (Also Read Trailing Dividend Yield)Uploaded bynetra14520
- Cash Flow StatementUploaded bynetra14520
- CIN ConfigurationUploaded bynetra14520
- To Read About PermitsUploaded bynetra14520
- AlphaUploaded bynetra14520
- Solvency and Its RatiosUploaded bynetra14520
- Cin Taxinn Procedure an OverviewUploaded bynetra14520
- thcorlemUploaded byswpitara
- Stock-Picking Strategies_ CAN SLIM _ InvestopediaUploaded bynetra14520
- Growth InvestingUploaded bynetra14520
- Indian GST Model LawUploaded byKshitij Deep Gairhe
- Cumulative ReturnUploaded bynetra14520
- Origins of ghuridUploaded bynetra14520
- 10636Uploaded bynetra14520
- Windows Speech Recognition Macros Release NotesUploaded byJohannes Haimann
- Eightfold PathUploaded bynetra14520
- Prat YaharaUploaded byfernandeantonio7961
- The Meaning of RelativityUploaded byMary Lin
- Raja YogaUploaded byjigi_here

- 16186429 Financial NumerologyUploaded byfyou@hotmail.co.nz
- compensation managementUploaded bysachinmanju
- SAM 4.1. Maintenance Strategic PlanningUploaded byRechian Hapsari
- Financial ManagementUploaded byJustus Musila
- Tejas Article _ Globalization of Tata Motors_ Strategic Plan for the FutureUploaded byKantesh Bhandari
- Quantitative Aptitude Sample Paper 2Uploaded bySymon Stefen
- 101207479 Business Plan on Maid ServiceUploaded byRochelle Dcunha
- COSO_Internal Control over External Financial Reporting.pdfUploaded bygitarasmana
- Experience Economy PDFUploaded byEvelyn
- Are you the weakest link?Uploaded byGregg Barrett
- Global StrategyUploaded byKim Jaenee
- Highly-skilled migration Estonia.pdfUploaded byMaximus Gustavus
- LectureNote2a_GRIPS.pdfUploaded byprasadpatankar9
- Incoterms 2010Uploaded byBhayani
- carbon budgetUploaded byVivudh Krishna Shukla
- Review Test Submission_ Quiz 5_ 2016 – EMIC2714 BFN ONjbjh.pdfUploaded byTumi Mothusi
- 0% Interest Rate LoansUploaded byBarkha Verma
- Social EnterpriseUploaded bydafuq 12344
- [David Vines, Christopher L. Gilbert] The IMF and Its CriticsUploaded byBorris A
- 29727484 Environment ScanningUploaded byDebojyoti Burman
- IFMUploaded byShivanand Kittur
- CH05Uploaded byHajra Zahra
- Koin TokenomyUploaded byBerril Mufardis
- 2011-1-12-Logistics as a Competitive Strategy Analysis of the Clothing Industry in Terms of LogisticsUploaded byHung
- FinQuiz-Level2Mock2016Version2JunePMSolutionsUploaded byAjoy Ramanan
- Ppt 11Uploaded by11008592
- tbch16Uploaded byTornike Jashi
- Group Assignment_Week 2_Great LeadersUploaded byYves Belebenie
- sibk eb-5 questionaire 1Uploaded byapi-310506505
- DOF - Department Order No. 17 - 04Uploaded byjjvii8