Return on Investment (ROI)
A performance measure evaluating the efficiency of an investment by dividing net profit by cost of investment, expressed as a percentage return.
Return on Investment (ROI)
A performance measure evaluating the efficiency or profitability of an investment by comparing its return (gain from investment minus cost of investment) to its cost, expressed as a percentage.
For example, if a company invests $500,000 in new equipment that generates additional profits of $100,000 annually, the first-year ROI would be 20% ($100,000 ÷ $500,000 × 100), indicating a 20% return on the capital invested.
ROI provides a straightforward method for comparing different investment opportunities and evaluating performance. The basic formula (Net Profit ÷ Cost of Investment × 100) can be adapted to various contexts, such as marketing campaigns, capital expenditures, or financial investments. While widely used for its simplicity and intuitive interpretation, basic ROI calculations have limitations: they don’t account for time value of money, risk differences, or investment durations. More sophisticated variations like Return on Invested Capital (ROIC) or Net Present Value (NPV) address some of these limitations for more complex investment decisions.