Return on Investment (ROI)
What is return on investment (ROI)?
Return on investment (ROI) is a widely used financial metric that measures the efficiency or profitability of an investment by comparing the net profit generated to the initial cost. Expressed as a percentage, ROI helps investors and businesses evaluate how well an investment has performed or compare the attractiveness of multiple investment opportunities.
Key takeaways
Profitability and efficiency indicator
ROI shows how much return is generated for every unit of currency invested, making it a core tool for assessing investment performance.
Simple calculation
- ROI = (Net Profit / Cost of Investment) × 100
- Or, ROI = [(Current Value of Investment – Cost of Investment) / Cost of Investment] × 100.
Versatile metric
ROI can be used for any investment-stocks, real estate, business projects, marketing campaigns, and more.
Comparative tool
Because ROI is a percentage, it allows for easy comparison between different investments, regardless of size or type.
Limitation
ROI does not account for the time period of the investment or the risk involved, so it is often used alongside other metrics for a complete analysis.
Why ROI matters?
Return on Investment (ROI) is a crucial metric that allows businesses and investors to compare the efficiency of various investments, guiding them to prioritize those with the highest returns. It helps organizations identify and redirect resources away from underperforming projects toward more profitable opportunities, serving as a key benchmark for assessing whether investments are meeting financial objectives. Additionally, ROI analysis promotes careful evaluation of the risk-reward balance, supporting more informed and calculated decision-making.
The ROI calculation process
Determine net profit
Net Profit = Total returns (or proceeds) – Total costs (including initial investment and any additional expenses).
Apply the formula
- ROI = (Net Profit / Cost of Investment) × 100
- Example: If you invest $1,000 and earn $1,200 after all costs, ROI = ($200 / $1,000) × 100 = 20%.
Interpret the result
A higher ROI means a more efficient or profitable investment.
Impact on business and investment decisions
Investment selection: Helps choose projects or assets with the best returns
Performance tracking: Measures success of past and ongoing investments
Resource optimization: Guides reallocation from low- to high-performing investments
Investor appeal: Attracts capital by demonstrating efficient use of funds
Real-world examples
Case study: Equipment investment
A company spends $50,000 on new machinery. Over its useful life, the machinery generates $75,000 in returns.
- Net Profit = $75,000 – $50,000 = $25,000
- ROI = ($25,000 / $50,000) × 100 = 50%
This means the investment returned 50 cents in profit for every dollar invested.
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
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Table of Contents
Return on Investment (ROI)
What is return on investment (ROI)?
Return on investment (ROI) is a widely used financial metric that measures the efficiency or profitability of an investment by comparing the net profit generated to the initial cost. Expressed as a percentage, ROI helps investors and businesses evaluate how well an investment has performed or compare the attractiveness of multiple investment opportunities.
Key takeaways
Profitability and efficiency indicator
ROI shows how much return is generated for every unit of currency invested, making it a core tool for assessing investment performance.
Simple calculation
- ROI = (Net Profit / Cost of Investment) × 100
- Or, ROI = [(Current Value of Investment – Cost of Investment) / Cost of Investment] × 100.
Versatile metric
ROI can be used for any investment-stocks, real estate, business projects, marketing campaigns, and more.
Comparative tool
Because ROI is a percentage, it allows for easy comparison between different investments, regardless of size or type.
Limitation
ROI does not account for the time period of the investment or the risk involved, so it is often used alongside other metrics for a complete analysis.
Why ROI matters?
Return on Investment (ROI) is a crucial metric that allows businesses and investors to compare the efficiency of various investments, guiding them to prioritize those with the highest returns. It helps organizations identify and redirect resources away from underperforming projects toward more profitable opportunities, serving as a key benchmark for assessing whether investments are meeting financial objectives. Additionally, ROI analysis promotes careful evaluation of the risk-reward balance, supporting more informed and calculated decision-making.
The ROI calculation process
Determine net profit
Net Profit = Total returns (or proceeds) – Total costs (including initial investment and any additional expenses).
Apply the formula
- ROI = (Net Profit / Cost of Investment) × 100
- Example: If you invest $1,000 and earn $1,200 after all costs, ROI = ($200 / $1,000) × 100 = 20%.
Interpret the result
A higher ROI means a more efficient or profitable investment.
Impact on business and investment decisions
Investment selection: Helps choose projects or assets with the best returns
Performance tracking: Measures success of past and ongoing investments
Resource optimization: Guides reallocation from low- to high-performing investments
Investor appeal: Attracts capital by demonstrating efficient use of funds
Real-world examples
Case study: Equipment investment
A company spends $50,000 on new machinery. Over its useful life, the machinery generates $75,000 in returns.
- Net Profit = $75,000 – $50,000 = $25,000
- ROI = ($25,000 / $50,000) × 100 = 50%
This means the investment returned 50 cents in profit for every dollar invested.
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.