What Is A Realistic Return On Investment?
The ROI is the return on investment after accounting for taxes and inflation.
The ROI is the annualized ratio of the total annual profit (or net profit) over the number of years divided by the annual price change of the investment.
Generally, if the ROI is greater than 7%, it is deemed as a safe and secure investment. Investment in stock investment can be as high as 32%.
For investors, these returns on investment are very important in the case of both equity and fixed-income investments.
Most investors want to make their investment as safe and secure as possible and therefore they prefer long-term investments such as government bonds.
In this context, the ROI can give some insight regarding the return on investment over a period of years.
If the ROI is less than 7% it can be deemed as a risky investment.
The return on investment in government bonds is more than government stocks and also over the number of years the investment would not fall below 7% hence less risky.
Safe And Secure Investment
There are a number of measures that investors can take to attain these returns on investment. These include taking a long-term view of the investment as it is more likely to be a safe and secure investment in the long run.
Also, diversification of the investment by investing in fixed income securities rather than stock is advisable as a stock investment is more likely to fluctuate at any point in time.
So, diversify your investments by investing in mutual funds. Also, investing in insurance, real estate, and gold is another good option to attain high returns on investment.
Further, looking for an investment that has lower risks such as equity can be a good option as you don't have to depend on the direction of the stock at a given point in time. Also, investing in cash is a good option as it reduces risks.
What Is A Realistic Return On Investment, The return on investment in stock investment can be as high as 32%, whereas in cash you can find investment having a return on investment of less than 12% and thus less risky.
What Is A Realistic Return On Investment, The ROI can be checked through the balance sheet, income statement, cash flow statement, etc. and these statements would provide some indication as to the condition of the company at a given period.
Also, comparing the income statement of the company with the previous and the current year will give a good insight as to the potential of the company.
If you find that the return on equity has gone up, you can consider buying the shares of the company.
So, looking for returns on investment over a number of years is a good option in the case of stock investment. Similarly, if you want to invest in real estate, the ROI can be checked against the price/earnings ratio.
Good stock investment can also have a good cash flow.
Check the balance sheet and income statement of the company, identify cash losses and if there are any, give them preference over buying more of the company.
For example, you have invested in a company with negative income but the price is high, buying shares is not a good option since your risk level is not reduced.
The cash flow statement is also good for checking for non-recurrent losses. You can check the loan payments, interest expense, and dividend payout to identify such non-recurrent losses.
If you can find companies with good earnings and cash flow, it will be a good investment option.
Also, one with a good balance sheet, good income statement, low loan payout, and good dividend payout is also good as the return on equity will be high and the risk is low.
Finally, when you compare the price of the stock with the dividend yield, the quality of the stock is also looked upon.
Lower dividend yield implies that the management is bad and not the stock. However, there may be a variation within the particular stock but a low dividend yield generally means that it is a bad investment option.
What Is A Realistic Return On Investment
When you have found a company with good earnings and cash flow, then you need to decide the percentage of investment that you want to make.
1. If you want to have a short-term option, the percentage that you want to invest in 15% to 20% or less.
2. If you want to have a long-term investment, it is then 15% to 25% to 40% or more.
Finally, the earnings per share should be kept at least 2 times the cash flow.
For example, if the earnings per share are $1.10 and cash flow is $1,000 monthly, the per-share price should be at least $0.92 to $1.00.
However, there are many other factors that determine the worth of the stock and the decision for the percentage of investment is more technical and dependent on the years of record of the company.
What are the factors that you need to consider in choosing the right equity?
Many companies may have maintained consistent revenue growth in recent years. But if the business has been able to grow at 20% or more in some years, then it may be good to invest in it.
Yet, if it has dropped below 20% growth, then it is likely to go bankrupt or consolidate.
B) Price Earnings Growth
What Is A Realistic Return On Investment, This is determined by calculating earnings per share over the past 5 years. This ratio is also known as P/E.
The Price-earnings ratio of a company is the P/E divided by the double price of the stock. There are 2 things that determine this ratio:
* Company growth rate – How fast the company has grown in terms of revenue.
* Earnings per share growth – How fast the stock has grown in terms of earnings.
This ratio is very important and it is usually based on years of history of the company.
If it has maintained over 50% earnings growth, then it is considered good. However, the P/E ratio of a stock has no correlation with its future price.
The price is based on past performance and the future price is determined by the stock analysts. The P/E ratio may be used in two ways:
* When determining the price of the stock, it is very important to determine the P/E ratio. Because the P/E ratio can be considered as a predictor of the future price of the stock, it may be used as an important part of the stock valuation.
But at the same time, this ratio is a dangerous thing because if the P/E ratio falls below 1, it is not profitable to invest in the stock.
* When calculating the value of the stock, this ratio must be considered as a factor and it is important to analyze the stock's growth and earnings ratio to determine its value.
The P/E ratio is commonly used in finance, economics, and accounting and also in research papers.
I hope that you found What Is A Realistic Return On Investment? useful in your research.