Return on investment = (Income - Cost) / Cost
Because it is easy to calculate the return on investment, it is a relatively popular measure of the profitability on an investment and can help in making investment decisions.
| ROI See return on investment. |
A generic term to define a number of analytical tools for measuring the financial benefits of an investment, including cash-on-cash, internal rate of return, equity dividend,and financial management rate of return.
What Does Return on Investment Mean?
A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. To calculate ROI, the return on an investment is divided by the cost of the investment, as shown here; the result is expressed as a percentage or a ratio. Return on investment is a popular metric because it is versatile and simple to use. If an investment does not have a positive ROI or if there are alternative investment opportunities with a higher ROI, the investment should not be undertaken.
Investopedia explains Return on Investment
One should keep in mind that the ROI calculation can be modified to suit the situation, depending on how an investment's returns and costs are calculated. In the broader sense, ROI is used to measure the profitability of an investment and there really is no “right” calculation. For example, a marketer may compare two different products by dividing the revenue that each product has generated by its costs. A financial analyst, however, may compare the same two products by using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. As can be seen, this can cause problems as ROI calculations can be manipulated to suit the user's purposes. In using ROI, one must be sure to know the inputs that are being applied.
Related Terms:
• Compounding
• Return on Equity—ROE
• Return on Investment Capital—ROIC
• Return on Net Assets—RONA
• Total Return
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