What is a 'Return'
A return is the gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment, and it is usually quoted as a percentage. The general rule is that the more risk you take, the greater the potential for higher returns and losses.
BREAKING DOWN 'Return'
While some investors will settle for principal protection, most investors are in search of return, specifically alpha returns. Alpha returns are generated when an investment generates more money than it costs. In general, there are three different types of return measures: return on investment, return on equity and return on assets. Each one is essentially calculated the same way, but the inputs have different labels.
Return on Investment
The most common return measure, also referred to as the return on investment, or ROI, is calculated by dividing the cost of the investment by the difference between the cost of the investment and the gain on the investment. It is the most generic way to calculate return and is the basic formula used to calculate other return measures. For example, if an investor pays $100,000 for real estate and then sells it for $110,000, the return is calculated by taking the difference between $100,000 and $110,000, and then dividing that number by the cost of the investment, or $100,000. The calculation is $10,000 divided by $100,000, or 10%.
Return on Equity
Return on equity, or ROE, is another commonly used measure of return used by those analyzing business performance. In this case, a company’s net income is the gain or loss, and the cost is the average of the company’s equity. ROE is used by investors looking for a return on the company's equity capital. If a company makes $10,000 in net income for the year, and the average equity capital of the company over the same time period is $100,000, the return on equity is 10%.
Return on Assets
Yet another commonly used measure of return is the return on assets, or ROA. It is commonly used as a measure of return by those analyzing financial stocks. In this case, net income is also the gain, but the investment is the assets of the company. Net income divided by average total assets equals ROA. For example, if net income for the year is $10,000, and total average assets for the company over the same time period is equal to $100,000, the return on assets is $10,000 divided by $100,000, or 10%.