To measure the success of bets, an indicator such as ROI is used. In particular, it is used on our website and often causes confusion among newcomers who bombard the admin with the question - what is ROI in betting? We answer.
The abbreviation ROI is derived from the English Return on Investment. Return on investment, in Russian. Or return on investment, such a translation can also be found. The ROI indicator is used not only in betting, but also in many other areas of economic and financial activity.
The ROI formula looks like this:
The ROI formula in betting is:
What is ROI and why is it needed at all, if you can just see who has what profit?
It's simple. Profit is an indicator that in itself says little. For example, Ivan won $10. Is he a good forecaster or a bad one? This cannot be said without knowing how much money he had to begin with and how many bets he had to make to win that much. If Ivan made a million bets of $100 and won only $10, then he cannot be called successful, right? And if Ivan made only 3 bets of $2 each and earned $10, the picture immediately changes, doesn’t it?
That is, ROI is necessary to show the effectiveness of the forecaster.
To make it easier to understand, let's use an example from real life. The janitor Vasily earned $200. Notary Semyon earned $50. Can we say that the janitor Vasily is more successful than the notary Semyon? No, we can't, because we don't know how much effort they put in to earn that much money. The janitor earned 4 times more, but for this he had to sweep the streets for a month without days off. The notary earned 4 times less, but for this he had to spend only 10 minutes certifying the document. So which one is more successful? Obviously, the efficiency of the notary Semyon is higher.
The same goes for betting. Let's say the profit of forecaster Alex123 is $200, and forecaster Kolya666 is $100. If there were no ROI indicator, one would think that Alex123 is more profitable than Kolya666. But what if Alex123 won $200 by making 1000 $10 bets, and Kolya666 won his $100 by making only 20 $10 bets? Obviously, in this case, Kolya666 is more effective and successful. That's what ROI is for - it shows the real effectiveness of the player. Shows what his profit is for every dollar he bets.
Thus, by calculating the ROI of different forecasters, you can compare their real effectiveness. This is why this indicator is used in bets.
It is important to note that if two forecasters have the same ROI, then the one with the longer distance term is more successful. For example, making an ROI of 10% over a distance of 10 bets is much easier than over a distance of 100 bets. Why? Simple: the greater the distance, the greater the investment. And we divide by investment. In other words, an ROI of 10% with a distance of 10 bets of $10 is only $10 in profit, and the same ROI with a distance of 100 bets of $10 is already $100 of profit.
What ROI is considered good? In betting, it is customary to start from 5% at a distance of 1000 bets. If a forecaster gives 5% (or more) over a distance of 1000 bets, it means he is very good. However, for a confident game of plus, 2-3% at such a distance is enough.
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The importance of ROI in marketing
Over the past few years, online advertising has bitten off significant shares of the radio, print and television market: its growth rate would be the envy of any yeast bacterium. Million-dollar budgets for context have not surprised anyone for a long time, so every advertiser asks a reasonable question: how to more accurately calculate the effectiveness of investments in advertising and, of course, increase this effectiveness to cosmic heights.
CR = number of leads or orders or targeted actions / number of targeted traffic *100%
If you received 100 hits, the number of targeted traffic is 1,000, then the conversion is 10%.
And what conclusion can be drawn regarding the profitability of the advertising channel from the above formula? Yes, none.
There is no universal pattern for choosing KPIs: for each type of activity in a specific situation, a certain metric or even a set of metrics is suitable.
A story about all the KPIs that exist in nature will make you yawn, so I have selected the most popular ones, those that are most often used to analyze the effectiveness of advertising campaigns on the Internet.
Several examples of KPI calculations for the curious
- CPA (Cost per action) - cost of an action.
CPA allows us to determine the cost of a target action.
- CPO (cost per order) - order cost
Here we already calculate how much the purchase costs us.
- ROI (return of investment) - return on investment. Hit odds! Allows you to evaluate the return on investment in advertising.
- The value of the visit. The coefficient is invaluable for determining rates in advertising campaigns.
Formula:
Value per visit = Revenue/Number of visits
- DRR (share of advertising costs). Online retailers love this metric.
I praised the ROI coefficient for a reason. I’ll tell you more about it below.
And now, actually, about the ROI coefficient in advertising
At first glance, calculating ROI looks like the simple formula that I talked about at the very beginning: income - costs/expenses *100. But it's not that simple.
Ideally, you need to deduct from income not only advertising costs, but also the total cost of the product (costs of its production, transportation, employee salaries, etc. expenses). These additional parameters must be taken into account if your task is to determine the return on investment with pinpoint accuracy.
A simpler way
It is used by many online marketers, including when working with online advertising:
Here's for clarity:
($800 billion in revenue - $400 billion in advertising costs) / $400 billion in advertising costs * 100 = 100%
It’s very simple and clear, you can calculate everything in your head.
If your number comes out positive, then you can assume that the investment has paid off; if it’s negative, something went wrong :(
Advanced method
Add a period to the formula:
ROI (period) = (Investment by the end of a given period + Income for a given period – Amount of investment made) / Amount of investment made
Sophisticated. But the formula makes it clear how much the volume of invested funds has grown by the end of the calculated period.
Why do you need to calculate ROI?
- one advertising channel (Direct, for example);
- several advertising channels (all advertising on the Internet);
- a separate product (bedside table);
- product groups (home furniture).
In this way, everyone can identify the strengths and weaknesses of an advertising campaign for a particular service or product. Thanks to modern web analytics systems, it has become easier to obtain data for ROI analysis, but difficulties still arise. You can set up goals that track sales in Google Analytics and Metrica, but if your client is not ready to tell you the product margin (or how much he earned) or does not allow you to transfer this data to analytics systems, then you will not be able to calculate ROI.
Of course, analysis without further action will yield nothing. This is a super boost to improving work efficiency.
The funny thing is that the products that the client believes should bring the maximum profit are not always the ones that show the best return on investment. And this is where the magic ROI formula will protect you from losing your money.
A contextual advertising specialist, armed with knowledge of ROI and the ability to calculate it, will devote all his passion to those advertising campaigns that show the highest return on funds. If nightstands sell better than poufs, he will focus maximum attention on the nightstands, raise the cost per click and promote the ads to the best positions. And for campaigns with a modest payback ratio, he will save your honestly earned rubles by setting a low cost per click and reducing the number of ads, and will also change the texts and perform a bunch of other useful manipulations.
In various economic sources you may come across the following abbreviations: ROI and ROR. We are talking about financial indicators. In the first case, there are types of return on investment or return on investment. In the second case, the rate of return. This indicator is usually used to indicate the degree of profitability or unprofitability of an investment project.
In Russian-language literature, these indicators may have different names. In particular, they can be called the return on invested funds, the rate of profitability, the level of return on invested capital.
Every successful investor pays a lot of attention to ROI. Understanding the specific return on investment values allows, if necessary, timely adjustments and changes to the corresponding investment project. Which leads to increased efficiency of the investor’s professional activities.
The ROI coefficient is usually expressed as a percentage. In a situation where it is more than 100%, the investor can invest money in the analyzed investment project, since its profitability is considered proven. When the indicator is less than 100%, then there is a high probability that the invested capital will not be recouped.
When calculating ROI, the following data is usually used:
- the cost of goods or services produced, which consists of total production costs. We are talking about the purchase of raw materials, logistics costs, wages of company employees;
- the value of total income from which cost is not subtracted;
- income, which is the total profit received from the sale of specific goods or services;
- the amount of investment, consisting of the total costs spent on the implementation of the relevant project.
There are several formulas for calculating ROI. The simplest of them is:
As we wrote above, a kind of watershed, a point of profitability and return on investment, is a result equal to 100%. A higher value will predict the profitability of the investment project, a lower value will predict unprofitability.
In practice, many successful investors are accustomed to calculating their return on investment on a monthly basis. This approach guarantees tracking of the existing dynamics of return on investments and, therefore, helps to obtain an extremely complete and objective picture of what is happening.
In what areas is it appropriate to use?
ROI allows you to calculate the return on almost all possible types of capital investment. At the same time, there are certain exceptions to this rule.
The ROI indicator allows you to analyze the following areas: direct marketing, sales promotion, customer loyalty programs and others.
Difficulties begin when calculating ROI, when the analyzed marketing event is complex in nature and cannot be correctly divided into its component parts. In addition, it is impossible to calculate the costs of marketing research.
ROIC indicator
In its full form it is called Return on Invested Capital. Translated into Russian, this means return on investment. This ratio is used when analyzing financial statements to assess the profitability of the company.
The ROIC value shows the degree of efficiency of investing capital in the core activities of a business entity. The value of this indicator allows you to determine the level of return received on capital contributed by external investors.
In other words, we are dealing with the actual return on money invested in an investment project.
Calculation formulas
ROIC is a kind of indicator that reflects the success of the company’s activities during the reporting period, which is the subject of current analysis. Potential investors are especially interested in its correct calculation.
There are two options for calculating the indicator in question. In the first case:
In the second case:
In order for the calculations to be correct, an important point should be taken into account. Net operating income should be considered after the deduction of adjusted taxes.
When calculating this indicator, data must be taken from the annual or quarterly profit and loss report, depending on the specific goals of the person conducting the analysis.
What is it used for?
ROIC is used as an indicator that indicates the ability of a particular enterprise to generate added value in comparison with competitors. On the one hand, if the level of the indicator is high enough, then this is considered to be evidence of professional and competent management. On the other hand, a high value of this coefficient may mean that the manager of the business is focused only on fully squeezing out profits. In this case, the opportunity for growth and development of the enterprise is sacrificed for profitability.
Thus, you and I understand that the return on investment ratio is only an indirect expression of the real value of the enterprise.
One of the main points in investing is assessing the profitability of investments in a particular asset. You can calculate profitability in different ways, often this is done directly in the brokerage report. In this article we will talk about calculation using the very popular Return on Investment (ROI) coefficient.
So, ROI is often used to evaluate the effectiveness of an investment. It is most often translated as “return on investment”, although sometimes the terms “return on investment”, “rate of return” and others are used.
This coefficient is widely used due to its simplicity and versatility. But there is one important nuance: it is imperative to understand who uses this coefficient and for what, because there are two common variations of it:
- ROI as a tool for comparing different assets in a portfolio
- ROI as an indicator of the management efficiency of a specific company
For example, you can see this picture:
As you can see, in this case we are talking about the ROI of various asset classes over a certain period of time. It can be seen that during the period from 2000 to 2010, the ROI of investments in American stocks fell, while the ROI of investments in real estate, on the contrary, increased noticeably.
Or take the example of General Electic from one of the past periods:
Here, ROI is presented as an indicator of the effectiveness of General Electric's management and shows that the return on investment for the reporting period was 2.98%. The formula for calculating ROI will be given below.
Important footnote : It should be remembered that there is also ROI as a marketing indicator in IT (the most common in terms of the popularity of queries in search engines), reflecting the effectiveness of advertising campaigns. To avoid confusion, in this case they sometimes talk about the ROMI (Return on Marketing Investment) coefficient, but not always.
ROI as a tool for comparing profitability
The meaning of the ROI ratio is simple: it is the net income received from an investment (including its sale) relative to the cost of its acquisition. Usually calculated and given as a percentage.
Formula: Net income / investment value
Example: let's say you bought a share for 100 rubles, received 10% dividends (10 rubles), and sold it for 120 rubles.
Then the ROI of the investment will be: [(120 + 10) - 100] / 100 = 30%
It is clear that if the sale price were, say, 80 rubles, then the investment would be unprofitable and the ROI would be mathematically negative. Using this ratio, you can very quickly assess which instruments in your portfolio generate more income.
In addition, the versatility of the coefficient allows it to be used to compare a wide variety of investments, including those belonging to different classes: stocks, bonds, mutual funds, real estate, direct investments in business, etc. For example, an apartment rental operation will be profitable if the rent is higher than the monthly mortgage payment. Multiply the difference by 12 and divide by the initial mortgage payment to obtain the numerical value of the coefficient.
Difficulties and errors
Most often, ROI is used to compare the effectiveness of investments that have already been made, that is, when you already have a reliable selling price, or a current price at which you can sell. When estimating the ROI of an investment that has not yet been completed, it becomes necessary to assume what the future selling price of the investment will be and, thus, make adjustments for potential changes in future value, which already distorts the original meaning of the coefficient. In this case, the use of other coefficients (for example, profitability) seems more justified.
The formula itself does not take into account the time of holding the investment. Therefore, in order to use it for assets with different holding periods, it is necessary to introduce an additional amendment. For example, if the portfolio contains stock A with a holding period of 2 years and an ROI of 30%, and stock B with a holding period of 1 year and an ROI of 10%, then for comparison you need to divide the ROI of stock A by 2.
The most common mistake is not to take into account various additional costs, such as transaction costs and taxes, when calculating the cost of an investment. When calculating ROI on real estate investments, you should not forget to include brokerage commissions, operating costs, tax payments, etc. in the cost of the investment.
What ROI is considered good?
If the ROI of an investment exceeds the average return for a given asset class in a given country, then the investment is traditionally considered highly profitable.
For example, the historical return on investment in American stocks included in the S&P500 index is about 8-12% per year (depending on what time period you take). The return on investment in Warren Buffett's shares over the entire period of its existence exceeds 15% per year. Thus, if the portfolio contains a stock of conditional Amazon and its ROI during ownership is 15% per year, then it can be considered a good investment in terms of profitability ratio.
ROI as an indicator of management efficiency
There are three traditional indicators that assess management effectiveness:
- Return on equity (ROE) - the company's return on equity
- Return on assets (ROA) - return on assets
- Return on Investment (ROI) - return on investment
They are often viewed together, as, for example, in the attached picture.
Here are the current odds for Microsoft from csimarket.com. There you can compare these coefficients with industry indicators:
Let's take a closer look at ROI. In this case, you can see that management has greater efficiency than companies in the S&P500 index, but less than in the sector of companies similar to Microsoft.
ROI calculation formula: Net profit / long-term investment * 100%
Net profit is usually taken for the last twelve months (TTM - trailing twelve months). Long-term investments are, respectively, the sum of the company's long-term liabilities and capital.
The overall meaning of the ROI ratio is how well management manages long-term investments, whether they are producing returns, and whether the company's growth is organic.
Difficulties and disadvantages
The main complaint about ROI, as well as in general about indicators based on financial reporting data, is their great dependence on accounting rules. Not only are these rules different in different countries, they can differ even among companies operating in the same country (GAAP standard and IFRS standard, for example).
As a result, a sharp change in net profit and a change in ROI indicators in one of the reporting periods may indicate purely accounting manipulation. Therefore, it is advisable to average ROI and other indicators of management efficiency and use them only as an additional argument and only if the investment horizon exceeds several years.
It should be taken into account that ROI reflects only the past and does not predict the future - future profitability can be with equal probability higher, the same or lower than calculated historically.
What ROI is considered good?
Here's what the current average ROI looks like in different sectors of the American economy:
How can this be useful to an investor? If the company in question has an ROI above or below the industry average, then an active investor can buy an undervalued stock with low earnings, or sell an expensive one if earnings are reverting to the mean. ROA, ROE and ROI coefficients can also be found on the finviz.com website by selecting the “Screener” menu and then “Financial”. However, different sites may have different values for ROI, which is likely due to different accounting standards used in the assessment:
