Return on Investment (ROI)

Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures the gain or loss generated on an investment relative to the amount of money invested. ROI is commonly expressed as a percentage and is a key factor in determining the success of an investment.

Formula for ROI

The formula for calculating ROI is:

ROI = (Net Profit / Cost of Investment) x 100

Where Net Profit is the amount gained or lost from the investment, and the Cost of Investment is the initial amount invested.

Importance of ROI

ROI is important as it provides investors with a quantitative measure of the return on their investments, allowing them to compare the profitability of different investments. It helps in making informed decisions regarding where to allocate funds and which investments are yielding the highest returns.

Interpreting ROI

A positive ROI indicates that the investment has generated profit, while a negative ROI signifies a loss. A higher ROI is generally preferred, as it indicates a more profitable investment. However, it is important to consider other factors such as risk and time horizon when evaluating investments solely based on ROI.