Return on Investment (ROI) in Information Technology

by Nicole Crawford

Return on investment is always a helpful measure of a given investment's efficiency and benefit. According to InformationWeek.com, with careful and comprehensive calculation and subsequent analysis, ROI is one of the best ways to measure the success of an investment in an information technology company.

Simple ROI

To determine simple ROI -- the most basic measure -- first subtract the cost of your investment from the gain you would receive by selling it. The result is your final gain. Then divide the final gain by the cost of the investment. For example, if you invest $1,000 and you earn $500, your final gain would be $500. Divide $500 by the cost of your investment, $1,000, to calculate your ROI, which would be 0.5, or 50 percent.

Discounted ROI

Although the simple ROI formula is the most common way to calculate returns, it isn't always the most thorough or realistic. According to IT Economics Corp., discounted ROI is a better way to calculate returns that involve the future, since it accounts for the fact that a dollar might not be worth as much in the future as it is in the present. To calculate discounted ROI, you will need to know your company's discount rate as well as all the information required for simple ROI.

Complications

In order to obtain an accurate ROI measurement, you must account for all of the various factors that contribute to your investment cost and profit. Be sure that you don't leave out any expenses in order to avoid over-calculating your ROI. If you re analyzing future ROI, make sure your discount rate is accurate. Before you choose an IT investment based on the company's ROI, clarify any questions about the inputs used to arrive at the ROI. As noted by Investopedia, ROI is a versatile and flexible calculation, which also means that it can be easily manipulated.

Analysis

ROI analysis can be particularly complicated for IT companies, according to the University at Albany's Center for Technology in Government. If you are selecting stock in IT companies, consider technological factors, like the complexity of the company's products related to changes in technology, as well as organization of the company and any other business-related factors. As with any investment, always consider other indicators before you choose an IT investment or attempt to analyze its overall performance.

About the Author

Nicole Crawford is a NASM-certified personal trainer, doula and pre/post-natal fitness specialist. She is studying to be a nutrition coach and RYT 200 yoga teacher. Nicole contributes regularly at Breaking Muscle and has also written for "Paleo Magazine," The Bump and Fit Bottomed Mamas.