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Return on Investment (ROI) - Calculation, Formula & Meaning (Hindi) | #28 Master Investor - YouTube
Channel: Asset Yogi
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Namaskar, my name is Mukul and welcome to Asset Yogi.
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Where we do not lock but unlock the knowledge of finance.
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Whenever you do investment
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or think about investing money in a project or a business
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Then it is very important that you calculate its return on investment.
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which we call ROI in short.
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It is not a difficult task to calculate ROI. You can do it very easily.
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In this video, I will show you how this calculation is done.
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Now, ROI's calculation is not a big deal,
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the main problem is that we sometimes don't calculate ROI at all.
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That whether any business or investment will give us positive returns or not?
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In fact, we become emotional, passionate and maybe stop thinking rationally
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when we become this passionate.
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So, I've often seen people making these mistakes.
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In fact, why talk only about people,
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I myself have sometimes committed these mistakes.
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And in this video, we will see which types of mistakes we commit
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while comparing projects, businesses, investments
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many times we don't understand where exactly we should invest our money?
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So, do this video from start to the end
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so that you don't commit these mistakes.
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Let's go straight to the blackboard.
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Now, see when we talk about return on investment
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then here I am not talking about any accounting convention.
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We will think clearly
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that how much money have we put in a business or an investment
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and how many returns do we get?
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According to that, we will think about calculating our returns on investment.
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So, let's take an example here
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You want to invest in a project
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by project, I mean any business, any franchise
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be it any kind of business investment
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it can be any investment like stocks, mutual funds, FD etc. etc.
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So, what we see when we put money in a project or an investment
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So on one side, we invest money and on the other side, we want the returns.
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From here, our cash is entered and from another side, it is out.
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So, this cash out is our return.
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and this cash in is our investment.
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So, we want to see how good returns do we get?
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and we want to compare the investments and products
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on the basis of ROI.
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These returns, which we got is actually per year returns
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whenever we are talking about ROI.
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So, in this, If I talk about the formula
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so if we write ROI's formula, then we will write
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the cash you get, I am writing in plain English
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cash you get per year
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divided by cash you put in.
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Means the amount of money you withdraw within 1 year
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divided by the money you deposited.
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This is your ROI.
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So, If I write this in another language
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then basically, your profit per year means the amount of money/profit you earned
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after excluding all the expenses.
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In this project or suppose you invested in any business
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in that all the expenses like rent, maintenance, salaries
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after taking out all the expenses, the profit you earned in a year
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you divided it by your investment.
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that how much money you invested in that.
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This formula is applied on every type of investment.
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If we talk about FD.
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Let's suppose you invested the money in an FD
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so when you talk about returns
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Let's suppose you say I am getting a profit of 7%
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so here you are talking about 7% returns of an FD.
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So here, ROI is 7%.
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Now suppose you invested in mutual funds, then
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what we talk about in mutual funds
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that how many percentage of returns can we get in a year?
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we can get 12-15% returns.
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We can get 12-15% ROI.
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If you invest in PF i.e. provident fund
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How many returns can you get here?
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you get an 8.5% return on investment.
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Now see, this is a very simplified calculation
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where you clearly know how much annual returns you are going to get.
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or how much is the annual interest being promised?
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But when we invest in a business
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or when we invest our money in any investment
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where we need to do some calculation
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where we need to do some brain work,
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then sometimes we make some mistakes.
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Let me give you an example for the same
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this is very easy to understand
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but still, we do very basic mistakes
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that many times, we couldn't compare two projects
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we invest our money where we should not
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and because of that only we continue bearing losses that too every year.
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Let me explain you with the help of an example
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Let's suppose you want to compare a project.
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Let's say you invested in a gym.
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Then let's say, our investment in this will come out to be of
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let me write investment as 'i' here
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Let's say you have to put around 1 crore here
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And how many returns it can give you?
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Means how much your profit per year can be?
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Let's say it can give you a profit of around 15 lakh per year.
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So here, what is our ROI i.e. return on investment?
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15 lakh divided by 1 crore, let me write 1 crore as 100 lakhs here
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So here, your ROI comes of 15%
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which is not that bad.
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Now, let's try to compare it with other investment
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Let's say you want to open an institute for vocational training
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and let's say your investment comes out to be of 1 crore here also.
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And le's say you want to compare
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whether you invest 1 crore in the gym or in vocational training
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And let's say your profit per year comes around 10 lakh rupees.
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10 lakh per year
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Now, here if you calculate ROI then
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here if you divide 10 lakhs by 100 lakhs then here you get 10%
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Now here, any wise fellow would say, 15% returns are better
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then why do I invest in vocational training?
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15% returns are always better
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Yes, absolutely right.
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If you are investing the whole money from your pocket, then there's no problem.
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Now here, the game changes a bit many times when you take a loan.
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Now, a loan means, one cost of capital has come.
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Because you won't be getting a loan for free.
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If you take a loan, then basically you've to pay the interest
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This interest is the cost of capital
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There's a cost of a loan and the cost is known as interest.
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Now, let's take an example.
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Let's say this investment of a complete 1 crore is done on loan.
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This 1 crore of investment has come 100% from the loan.
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Let's say it's interest rate...
at an interest rate of
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Let's say you have to take this loan at 18%
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Now, let's see how the equation changes
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Your interest per year will be
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if you pay interest per year, then
if you calculate 18% of 1 crore
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then you have to pay 18 lakhs per year as interest.
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Your profit was 15 lakhs per year.
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So here the equation has completely changed.
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Here, your ROI was less than the cost of capital.
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See here, your ROI is 15%
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Here this ROI of 15% is less than the cost of capital of 18%
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So definitely, its going to be your loss only.
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See here, every year you are earning 15 laakhs and paying the interest of 18 lakhs.
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So every year you arre doing the loss of 3 lakhs per year.
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Let's see how the equation changes for the second project.
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Let's assume for vocational training institude,
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the government gives a loan of 100%.
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Let's say here you get the loan on 7%.
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For example, it is a subsidised loan.
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So here, when you will do your interest calculation
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how much your interest per year will be?
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On 1 crore, according to 7%, it will be 7 lakhs per year.
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How much you are earning?
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10 lakhs per year.
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So here, your ROI i.e. Return On Investment.
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Return on investment means this 10% is more than 7%.
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So the return of investment is more than the cost of capital.
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That means here overall you are getting profit.
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So how much is your overall profit here?
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You are getting a profit of 3 lakhs per year.
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Now, this is basically, profit after interest.
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When we will the overall calculation, it will be profit after interest.
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And when we are calculating overall profit after interest
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then you are going in loss overall.
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Whenever you are selecting a project, you should only select
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when your return of investment is greater than the cost of capital.
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Now, oftentimes we call return on investment as return on capital.
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So your return on capital should be greater than the cost of capital
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then only invest in that project.
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Now let me give you one more example of this.
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People do many mistakes here.
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For example, people invest in real estate.
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See if you want to live in that house then it is a different thing altogether
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then after staying you are calculating its value in a different way.
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But if you treat real estate as an investment
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Then many times you suffer loss as well.
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I am not saying real estate is a bad investment. No. it is not like that.
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but if your timing is wrong, then real estate can be a very bad investment.
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Let's understand this too with an exxample.
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Lets sppose this house is also of 1 crore.
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And let's say you do the downpayment of 20 lakhs,you pay directly from your pocket.
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And take a loan of 80 lakhs.
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Let's say you get a loan on 10% interest rates.
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Now, for this, you get a rent
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See, where you'll get the profit from?
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If you yourself are living, then obviously there will be no rent.
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Here, we are talking about investment.
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So let's assume you give it on rent.
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First, you will be profited by rent and second will be your capital appreciation.
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Because rates also increase in real estate. That's where you get the profit from.
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So what should be your rent plus appreciation?
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as we have talked about in ROI.
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These two portions are of ROI, right.
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What should be your ROI?
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It should be greater than the cost of capital.
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This means it should be more than 10%.
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Rent's portion, if I talk about let's say residential, is around 3%
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That means your capital appreciation should be 7% every year.
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If your capital appreciation is less than 7%, then it is a very bad investment.
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Now, let's assume there's no capital appreciation in 4-5 years in real estate.
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It becomes your dead investment
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and you are paying money from your own pocket every year.
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So because of that, oftentimes, people do not handle it well.
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So whenever you invest money anywhere, what do you have to do first?
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Have to calculate its return on investment.
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If you are taking a loan, then you should subtract the interest on that
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and then calculate the profit.
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Then calculate your return on investment.
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Or if you are talking about before interest
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then your return on capital should always be greater than the cost of capital.
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Keep this thing in your mind.
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Suppose your interest is of 10%, then return should be greater than 10%,
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then only you will be profited.
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So basically, I've given you a preliminary on return of investment.
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Now, we will go into more detail in
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return on assets, return on equity, return on capital employed
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How to calculate all these?
I'll be discussing these in coming videos.
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I hope you liked this video
so do like and share it.
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If you have any suggestions or you want to suggest any topic for future videos
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then you can do it in the comments section below.
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I keep coming every day with these kinds of interesting finance videos
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So, if you haven't subscribed to the channel yet
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then do subscribe and press the bell icon on your phone
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so that you get my latest video notification.
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So see you in the next video
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till then keep learning, keep earning, and be happy as always.
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