The percentage of net gain or loss on an investment over a period.
Rate of Return (RoR), also called Return on Investment (ROI) compares an investment to its gain or loss over time, expressed as a percentage of the original investment. A positive RoR indicates the investment has increased; a negative RoR indicates the investment has lost value.
Investments can consist of any number of assets, including but not limited to stocks, bonds, real estate, and fine art.
Rate of Return for your company’s assets is an important KPI for your finance team to monitor.
Rate of Return is one of the foundational metrics of financial analysis. It’s a simple measure that nonetheless reveals a great deal – are your investments actually paying off? Calculating a Rate of Return will allow you to see if you’ve wisely chosen assets to invest in. It can also help you determine the appropriate course of action for a major financial decision.
For example, suppose you want to relocate your company headquarters and sell your current building. By calculating the RoR on your real estate from its initial purchase value to its current value, you’ll be able to determine the gain or loss to the property value and plan for the future accordingly.
To find RoR, subtract the initial value of the asset from its current value. Divide the result by the initial value, and multiply this answer by 100 to obtain a percentage.
The best practice for Rate of Return is, naturally, to make high-yielding investments. A good annual RoR is considered to be 7 percent, per the inflation-adjusted yearly rate of the S&P 500.
Important! One of the key flaws in RoR is that it does not account for inflation over time. To incorporate this factor into your calculations, use the real RoR metric.
Other KPIs similar to Rate of Return include: