Return

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What is a 'Return'

A return, also known as a financial return, in its simplest terms, is the money made or lost on an investment. The amount of a return can be positive or negative and can be expressed in dollars or as a percentage using relevant beginning and ending dollar values of a stated time period.

BREAKING DOWN 'Return'

Positive Return

A positive return is the profit, or money made, on an investment or venture. 

Negative Return

A negative return is the loss, or money lost, on an investment or venture.

Nominal Return

A nominal return is the net profit or loss of an investment expressed in nominal terms. It can be calculated by figuring the change in value of the investment over a stated time period plus any distributions minus any outlays. Distributions received by an investor depend on the type of investment or venture but may include dividends, interest, rents, rights, benefits or other cash-flows received by an investor. Outlays paid by an investor depend on the type of investment or venture but may include taxes, costs, fees, or expenditures paid by an investor to acquire, maintain and sell an investment.

For example, assume an investor buys $1,000 worth of publicly traded stock, receives no distributions, pays no outlays, and sells the stock two years later for $1,200. The nominal return in dollars is $1,200 - $1,000 = $200.

Percentage Return or Return on Investment (ROI)

A percentage return is a return shown as a percentage. It is known as the Return on Investment (ROI).  ROI is the return per dollar invested. ROI is calculated by dividing the dollar return by the dollar initial investment. This ratio is multiplied by 100 to get a percentage.  Assuming a $200 return on a $1,000 investment, the percentage return or ROI = ($200 / $1,000) x 100 = 20%.

Holding Period Return

A holding period return is an investment's return over the time it is owned by a particular investor.  Holding period return may be expressed nominally or as a percentage.

Rate of Return

Rate of return is the proportion of profit earned from an investment during a periodic interval of time, expressed as a percentage.  For example, the return earned during the periodic interval of a month is a monthly return and of a year is an annual return.  

Return Annualization

Returns over periodic internals of different lengths can only be compared when they have been converted to same length intervals. It is customary to compare returns earned during year long intervals. The process of converting shorter or longer return intervals to annual returns is called annualization

Return of Capital

Return of capital means the recovery of the original investment.

Returns Measured and Compared With Financial Ratios 

Investors measure performance and compare returns with financial ratios.  Financial statement metrics are compared by dividing one into the other in financial ratios.  Financial ratios measure the current or forecast the future performance of an investment or a company and compare the resulting ratio to that of other investments, companies, industries or markets. 

Three commonly used financial ratios are:

Return on Investment (ROI)

Return on Investment (ROI) is a profitability ratio figured as (net profit divided by investment cost) x 100 that measures the performance of an investment. For example, if an investor pays $100,000 to buy real estate and then sells it for $110,000, the ROI is $10,000 divided by $100,000, or 10%.

Return on Equity

Return on Equity (ROE) is a profitability ratio figured as net income divided by average shareholder’s equity that measures how much net income is generated per dollar of stock investment.  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 ROE is 10%.

Return on Assets

Return on Assets (ROA) is a profitability ratio figured as net income divided by average total assets that measures how much net profit is generated for each dollar invested in assets.  It determines financial leverage and whether enough is earned from asset use to cover the cost of capital.  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 ROA is $10,000 divided by $100,000, or 10%.