Return on Investment

What is Return on Investment?

Return on Investment (ROI) Return on investment isn't necessarily the same as profit. It is a performance measure used to evaluate the Efficiency of an investment or compare the efficiency of a number of different investments. ROI deals with the money you invest in the company and the return you realize on that money based on the net profit of the business. ROI tries to directly measure the amount of return on an particular investment, relative to the investment’s cost.

ROI is a popular metric because of its versatility and simplicity. Essentially, ROI can be used as a rudimentary gauge of an investment’s profitability. This could be the ROI on a stock investment, the ROI a company expects on expanding a factory, or the ROI generated in a Real Estate transaction.

If an investment’s ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options. Likewise, investors should avoid negative ROIs, which imply a net a loss.

ROI Formula

The return on investment formula:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment

To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.