# Rate of return (ROR)

## What is the rate of return?

The rate of return (ROR) is the percentage of profit you make on an investment. It's a measure of the profitability of an investment.

## How do you calculate the rate of return?

The rate of return is simply the percentage change in value over a period of time. It's calculated by subtracting the initial investment from its final value, then dividing that number by the initial amount invested. It's then multiplied by 100 to get a percentage.

Rate of return

=

( Initial investment − Final value )

÷  Initial investment

× 100

1. To get started, you need to know how much money was invested in the first place (the cost). This is called cost basis.
2. Next, figure out what the investment was worth at some point during its lifetime—maybe when it was sold or at some other milestone along the way. This is called market value, because it represents what someone would pay for that asset on an open market at any given moment in time (rather than what they paid originally).
3. Finally, use these two numbers plus some simple math to calculate your return: divide market value by cost basis, then multiply this number by 100 percent (to get rid of decimals), which gives us our final answer.

## What are the benefits of calculating the rate of return?

The rate of return is an important financial metric that helps you to understand the profitability of your investments, as well as the cost and risk.

Calculating the rate of return allows you to make better decisions about how much money you want to spend on future investments. For example, if an investment has a high potential for growth but also comes with a higher risk profile than other alternatives (i.e., it could lose value), then it would probably be best not to invest in that particular asset class at all—or at least not until you've had time for more research or experienced professionals have vetted it.

## Why do manufacturing companies calculate the rate of return?

The rate of return can be used to decide whether or not a manufacturing company should continue with a project. If the rate of return is high, for example, the company will make more money than it costs them to complete the project. This is called the profit, and it indicates whether it's worth investing in a particular venture.

If, on the other hand, your manufacturing business isn't seeing much profit from its efforts then continuing with this particular venture may not be sustainable because there isn't much financial benefit at all (or even worse: it has a loss).

## What is a good rate of return?

The rate of return should be higher than the cost of capital. The cost of capital is the opportunity cost, or alternative investment that could have been made with the same amount of money (or less). This will vary from company to company and industry to industry, but it's usually somewhere between 6% and 10%.

## Calculating your rate of return helps you make better business decisions

Calculating your return on investment allows you to make better decisions about how much money you want to spend on future investments. This is because it provides a way to compare the performance of an investment with that of other investments.