Return on Investment (ROI) is a financial metric used to evaluate the efficiency or profitability of an investment or compare the efficiency of several investments. It is a ratio between the net profit (or loss) from an investment and its cost, expressed as a percentage or a ratio. Here are the key points about ROI:
-
Calculation: ROI is calculated by dividing the benefit (or return) of an investment by the cost of the investment. The formula for ROI is: $$ROI = \frac{Net\ Profit}{Cost\ of\ Investment} \times 100$$.
-
Purpose: In business, ROI is used to measure rates of return on money invested in an economic entity to decide whether or not to undertake an investment. It is also used to compare different investments within a portfolio, with the investment having the largest ROI usually being prioritized.
-
Types of ROI: ROI may be extended to terms other than financial gain. For example, social return on investment (SROI) is a method for measuring extra-financial value relative to resources invested, such as environmental and social value not currently reflected in conventional financial accounts.
-
Good ROI: A good ROI is any percentage or ratio result that is above 0%. If the ROI is more than 0%, the investments are profitable and making money for the business.
In conclusion, ROI is a crucial metric used to evaluate the efficiency and profitability of investments, helping individuals and businesses make informed decisions about their financial endeavors.
