Return on Investment (ROI)
Overview
Return on Investment (ROI) is a financial metric that is widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. The formula for ROI is: ROI = (Net Profit / Cost of Investment) x 100%.
Understanding ROI
ROI is a key performance indicator (KPI) that's used by businesses to determine the profitability of an expenditure. It's used by companies to measure the return on investment from different business activities. For example, a business may use ROI to compare the effectiveness of different advertising campaigns, the profitability of its inventory, or the feasibility of investing in new equipment.
Calculation
ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100 to get a percentage.
Uses of ROI
ROI is used in finance, real estate, and investing. It can be used to compare the profitability of different investments, to measure the efficiency of an investment, or to estimate the return on a future investment. ROI is also a common metric in marketing to measure the effectiveness of different marketing campaigns.
Limitations of ROI
While ROI is a powerful tool for measuring the efficiency of an investment, it has its limitations. For one, ROI doesn't take into account the time value of money. Additionally, ROI can be manipulated to show higher returns than what is actually being earned.
See Also
Understanding Net Profit Understanding Cost of Investment Understanding Key Performance Indicators
Please note that this is a simplified version of an article on Return on Investment. For a more detailed and comprehensive article, please refer to expert financial resources or textbooks.