Financial Metrics · Basic level · 3 min read ·
What is ROI and how is it calculated?
ROI is a percentage that compares a participation's total result with the amount contributed: how much more, or less, came back for every 100 put in. It is easy to calculate and to read, but it doesn't say how long it took to get that result.
In 30 seconds
- ROI = (total received − contribution) ÷ contribution, as a percentage.
- It can be positive or negative: it also shows when less comes back than was put in.
- It leaves out time: the same ROI over 2 years or over 10 years is very different.
Why should you care?
ROI answers the most direct question: for every 100 I put in, what was the result?
- You read a participation's accumulated result at a glance.
- You compare amounts of different sizes with one measure.
- You know when to pair it with IRR, which does account for time.
Think of it as a final exam grade
A grade of 90 says how well you did, not whether you studied for a week or a semester. ROI is that final grade: it sums up the result, but not how long it took to get there.
How does ROI work?
- 1
Start from the contribution
The amount you participated with.
- 2
Add up everything received
The operation's distributions and, if it has happened, what was received at the exit.
- 3
Subtract and divide
Subtract the contribution from the total received and divide by the contribution. Multiply by 100 to read it as a percentage.
The formula
ROI = (Total received − Contribution) ÷ Contribution × 100
- Total received
- = distributions plus what was received at the exit
- Contribution
- = the amount you participated with
An example with numbers
Illustrative figures, unrelated to any project: a 2,000,000 peso participation that has ended.
| Contribution | 2,000,000 pesos |
|---|---|
| Distributions received | 300,000 pesos |
| Received at the exit | 2,100,000 pesos |
| Total received | 2,400,000 pesos |
| ROI | 20% |
(2,400,000 − 2,000,000) ÷ 2,000,000 = 20%. If that took two years, it is a very different result than if it took eight: IRR is what measures time.
Where do you see it at Circular Urban?
In Your portfolio, the dashboard shows the ROI of your participations. On solar project sheets, the Financial Models section shows a projected ROI over the model's whole horizon. One measures what has accumulated; the other is a non-binding reference projection, subject to the project's actual performance.
- Your portfolio, on the dashboard: ROI.
- Solar project sheets, in Financial Models: ROI.
What changes in your finances once you get it
You measure any purchase made for a result
A course, a tool or a small business: you compare what it left you with what it cost.
You put a date on it
Whenever you hear an ROI, you ask how long it took.
You count every cost
If you forget a cost, ROI comes out higher than it really was.
Common mistakes
- Myth
A 40% ROI over four years is 10% a year.
- In reality
With compounding it is about 8.8% a year, because 1.088 to the fourth power is roughly 1.40.
- Myth
A higher ROI always means a better participation.
- In reality
Look at the term and the risk. A lower ROI reached in less time can be a better annual result.
- Myth
The projected ROI on a project sheet is what I'll get.
- In reality
It is a non-binding reference projection. The actual ROI depends on the project's performance.
Test yourself
You contributed 400,000 pesos and received 500,000 pesos in total. What is the ROI?
Keep learning
Helps to know first
What comes next
This content is educational. Every participation carries risks inherent to the project, including the possibility of partial or total loss, and results are subject to each project's actual performance.
