How to Estimate Return on Investment

The basic formula for return on investment is net gains divided by the investment cost.
The basic formula for return on investment is net gains divided by the investment cost. (Image: TongRo Images/TongRo Images/Getty Images)

It's fairly simple to calculate return on investment after you've sold the investment. It's a bit trickier to do so while you still hold the asset. But by estimating future dividends and the projected selling price, you can calculate an estimated return on investment.

Estimate Return on Investment

Estimate the total amount of dividends you will receive from the investment. You can use past information, company policies and the expert opinion of financial analysts to predict how dividends might be paid. For example, say that you bought a stock four years ago that has paid an average of $50 in dividends the last four years and you plan to sell it in two years. If you expect company dividend policy to remain the same and company income levels to remain relatively stable, you can assume you'll receive the same amount of dividends in the future. You can then estimate that you'll receive total dividends of $50 multiplied by 6 years, or $300.

Estimate the investment's selling price when you plan to sell it. To estimate selling price, research analyst and company projections on stock growth and apply it to the current price of the stock. Using the example above, say that the stock you bought four years ago is currently worth a total of $200. You plan to sell it in two years, and analysts predict the stock price will rise by around 5 percent a year. Your estimated selling price after one year is $200 multipled by 1.05, or $210. The price at the end of the second year would be $210 multiplied by 1.05, or $220.50.

Calculate how much you originally spent to obtain the stock. This is the purchase price of the stock plus any related purchasing or brokerage fees you can directly allocate to the purchase of stock. For example, if you bought the stock for $100 four years ago and paid a $4 trading fee to do it, your initial investment was $104.

Subtract the initial cost of the investment from its estimated selling price and estimated total dividends to calculate your net gain on the investment. In the above example, the total dividends would be $300, the estimated selling price is $220.50 and the original cost was $104. If there are no new fees you have to pay when you sell the stock, the net gain is $300 plus $220.50 minus $104, or $416.50.

Divide the net gain on the investment by the initial investment cost to calculate the estimated return on investment. For example, if the net gain on investment is $416.50 and the original cost was $104, the return on investment is 400.5 percent. The higher the return on investment, the more income you were able to derive from the investment relative to your initial costs.

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