<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=8347180831966915&amp;ev=PageView&amp;noscript=1">
❮ Go back to glossary Rr

Return on Investment (ROI)

Featured Image

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

1
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.

2
Simple calculation
  • ROI = (Net Profit / Cost of Investment) × 100
  • Or, ROI = [(Current Value of Investment – Cost of Investment) / Cost of Investment] × 100.

3
Versatile metric

ROI can be used for any investment-stocks, real estate, business projects, marketing campaigns, and more.

4
Comparative tool

Because ROI is a percentage, it allows for easy comparison between different investments, regardless of size or type.

5
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

Blue border
1
Determine net profit

Net Profit = Total returns (or proceeds) – Total costs (including initial investment and any additional expenses).

2
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%.


3
Interpret the result

A higher ROI means a more efficient or profitable investment.

Impact on business and investment decisions

Blue border

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

Impact on financial statements

Real-world examples

Blue border

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.

Frequently asked questions about ROI?

Blue border
A “good” ROI depends on the industry, risk, and alternative opportunities. Higher is generally better, but context matters.
Yes. A negative ROI means the investment generated a loss
By increasing returns, reducing costs, or both.