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Back to Basics: Return On Investment & Cost Justification

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Investors today have more investing choices than ever when it comes to selecting the best place to put their discretionary dollars. With so many different investment vehicles (mutual funds, stocks, bonds, money markets, certificates of deposit, alternative investments) on the market, you may be wondering how you can identify a winning investment from a losing one. The best way to evaluate the potential of any investment asset is to take a look at its past performance with metrics such as ROI justification.

Return on Investment Statistic

The return on investment statistic is one of the most popular investment metrics used by both value and growth investors. Evaluating the return on investment (ROI) of a security will help you determine exactly how efficiently and effectively a particular stock, bond, or mutual fund investment really is. The return on investment statistic takes a look at the cost of an investment by subtracting it from the total gain or loss (amount of money made or lost) from the investment. This is typically expressed as a percentage. Return on equity (ROE) will tell you how effectively a company is using the investment dollars that you have trusted them with.

Cost of Investment

The cost of an investment is critically important because it determines whether an investment is a winning or losing proposition. Two investors can purchase the exact same stocks at different price points which can make the purchase a great buy for one investor and a poor investment for the other one. A positive return on investment is often a sign of a good investment opportunity whereas a negative return on investment should make an investor take an extra look before deploying their investment dollars.

You will notice a direct correlation between the price that a company’s shares are selling at and the historical rate of return on an investment. Investors are willing to pony up big bucks to buy stocks and mutual funds with higher REO numbers than their competitors. That is because these companies have a track record of profitability which increases the chances that they will outperform competitors in the future.

In other words, you will find that investors pay less attention to the cost of an investment when the return on investment is higher.

Investment Tips

  • Be sure to look at statistics like return on assets (ROA) and return on equity (ROE) with the best investment tracking software.
  • A double digit return on investment is a good starting point for any potential investment purchase.

Mark Riddix started writing in 2007 and has been writing online since 2008. Mark has written for Forbes, Investopedia, New York Daily News, Google Finance and Yahoo Finance. He holds a bachelor’s degree in finance from Oral Roberts University.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you and/or your business.

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