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How To Calculate Basic Sales ROI

May 9, 2008
Every businessman should have basic knowledge on sales ROI or Return on Investment. This is how one gauges the profitability of his business and this is an integral tool in determining what decisions to make and what business direction to take. Always used as a standard reference to set a profit goal, Return on Investment is or ROI is often termed in percentage values. In addition, ROI is a measurement of how a group or a company uses its available resources to generate more income.

In normal mathematical formula, the ROI is equivalent to Net Profit divided by Net Worth. Net Profit is the company's earning's after all expenditures have been taken away from the gross sales. This includes payment for manpower, electricity, utilities, capital on raw materials, indirect costs, liabilities such as debts, and others. Net Worth is the worth of the company itself.

Sales ROI is a popular terminology in big corporations or for people who invested in the stock market trade. The calculation is taken against the probable profit from buying stock shares and identifying how much these stock shares can generate profit. Several formulas have then become available as mathematicians studied these probabilities based on statistical analysis. These formulas, in return, are used by many business conglomerates to help them make wise decisions whether to pursue a pending business interest or not.

The first formula worthy of discussion is the formula of Simple Return. According to this formula, the Return on Investment or Sales ROI is equivalent to the net proceeds plus any dividends divided by what you paid minus 1. Here is an example. Let us say that you bought 100 stock shares from a telephone company for $10.00 USD per share. Other than that, you paid a commission worth $5.00 USD. The total equivalent or cost of this investment is $1005.00 USD. This is because you have to multiply the number of shares to its price per share and then add the commission.

After a few years, you decided to sell your stock shares for $15 USD each. Add to this the $5.00 USD commission. If you receive $2.00 USD per share, your total received dividends is 100 shares multiplied by $2.00 USD equals $200.00 USD.

The final calculation is this: $15.00 USD X $200 .00 USD = $3000.00 USD. Subtract $5.00 USD for the commission. This gives you $2995.00 USD for your net proceeds.

Finally, you use the very first formula mentioned above. Net proceeds + dividends / what you paid for - 1.

In our example: Simple return is equal to: $2995 (net proceeds) + $200 (dividend) / (Total expense paid) $1005 - 1

= 3195 / 1005 - 1

= 3.179 - 1

= 2.179 or 217%

This example may be very big. In the average, people only receive about 20% to 30% Return on Investment. Remember, knowing how to calculate Return of Investment based on this formula is only a guideline. The promised dividend from the share may not be as it is presented here since the stock market is heavily affected by certain conditions and circumstance, such as calamities and politics. Thus, it is always recommended that an expert financial analyst or adviser should be consulted if one is interested in calculating Sales ROI.
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