ROL stands for Return on Investment or Return on Capital. It is a financial ratio that measures the profitability or efficiency of an investment or capital. There are different ways to calculate ROL, depending on the specific context and variables involved. Here are two commonly used methods:
1. Basic ROL Calculation:
ROL = (Net Profit / Investment) * 100
In this method, you calculate the net profit generated from the investment and divide it by the initial investment. Then, you multiply the result by 100 to express it as a percentage.
For example, if you made a $10,000 investment and earned a net profit of $2,000, the ROL would be:
ROL = ($2,000 / $10,000) * 100
ROL = 20%
This means that for every dollar invested, you earned a return of 20 cents.
2. ROL with Average Capital:
ROL = (Net Profit / Average Capital) * 100
In some cases, it may be more accurate to use the average capital instead of the initial investment. This is especially useful when the investment capital changes over time.
To calculate ROL using average capital, you take the average of the beginning and ending capital. Then, you divide the net profit by the average capital and multiply by 100 to express it as a percentage.
For example, if the beginning capital is $5,000, the ending capital is $7,000, and the net profit is $1,000, the ROL would be:
Average Capital = (Beginning Capital + Ending Capital) / 2
Average Capital = ($5,000 + $7,000) / 2
Average Capital = $6,000
ROL = ($1,000 / $6,000) * 100
ROL ≈ 16.67%
This means that for every dollar of average capital, you earned a return of approximately 16.67 cents.
It's important to note that ROL is just one measure of investment performance and should be used in conjunction with other financial ratios and considerations to get a comprehensive understanding of an investment's profitability.