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. A return can be expressed nominally as the change in dollar value of an investment over time. A return can be expressed as a percentage derived from the ratio of profit to investment.
BREAKING DOWN Return
Prudent investors know that a precise definition of 'return' is situational and dependent on the financial data input to measure it. An omnibus term like 'profit' could mean gross, operating or net, before tax or after tax revenues or income. An omnibus term like 'investment' could mean selected, average or total assets, debt or equity. Below are definitions of return variations common to finance lexicon. We give them to you with the caveat that the financial metrics underlying each return must be evaluated on a case by case basis to truly understand the meaning of a particular return.
A positive return is the profit, or money made, on an investment or venture.
A negative return is the loss, or money lost, on an investment or venture.
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 expressed 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.
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 ratios are a subset of financial ratios that measure how effectively an investment is being managed. They help to evaluate if the highest possible return is being generated on an investment. In general, returns ratios compare the tools available to generate profit, such as the investment in assets or equity, to net income, the actual profit generated. Returns ratios make this comparison by dividing selected or total assets or equity into net income. The result is a percentage of return per dollar invested that can be used to evaluate the strength of the investment by comparing it to benchmarks like the returns ratios of similar investments, companies, industries, or markets. Two commonly used returns ratios are:
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%.