ROI stands for Return on Investment, which is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. It is a ratio that compares the gain or loss from an investment to its cost. ROI is expressed as a percentage and is calculated by dividing an investments net profit (or loss) by its initial cost or outlay. The result is expressed as a percentage or a ratio. ROI can be used to make apples-to-apples comparisons and rank investments in different projects or assets.
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The value of net profit should be taken from the company's profit and loss (P&L) statement. The equation looks like this: ROI = (Net Profit / Investment) x 100.
ROI is a popular profitability metric used to evaluate how well an investment has performed. It can be used to calculate the actual returns on an investment, to project the potential return on a new investment, or to compare the potential returns on a number of investment alternatives. ROI can be applied to most areas of a business and works as a simple but effective method to measure performance. However, ROI does not take into account the holding period or passage of time, and so it can miss opportunity costs of investing elsewhere.
