A:

ROI is a performance metric used to evaluate the financial efficiency of an investment, or to compare the relative efficiency of multiple investments. It measures an investment’s gain or loss relative to the initial investment. ROI is calculated as follows:

ROI = (earnings – cost of investment) / cost of investment * 100%

While ROI is often associated with purely financial investments – such as the purchase of stock shares or an investment in a mutual fund – ROI figures can be calculated for nearly any activity into which an investment has been made and an outcome can be measured. The outcome of a ROI calculation will vary depending on which figures are included as earnings and costs. The longer an investment horizon, the more challenging it may be to accurately project or determine earnings and costs and other factors such as the rate of inflation or the tax rate. It can also be difficult to make accurate estimates when measuring the monetary value of the results and costs for project-based programs or processes (for example, calculating the ROI for a Human Resources department within an organization) or other activities which may be difficult to quantify in the near-term and especially so in the long-term as the activity or program evolves and factors change. Because of these challenges, ROI can be less meaningful for long-term investments.

RELATED FAQS
  1. What is the difference between ROCE and ROI?

    Understand the difference between return on capital employed and return on investment and how analysts use these performance ... Read Answer >>
  2. What is the formula for calculating return on investment (ROI) in Excel?

    Find out more about return on investment (ROI) and the formula used for calculating return on investment for a company in ... Read Answer >>
  3. How does JIT (just in time) production affect ROI (return on investment)?

    Learn about the "just in time" production strategy and how this on-demand system affects return on investment by reducing ... Read Answer >>
  4. How do I calculate incremental return on investment capital?

    Discover how to calculate a company's return on incremental invested capital, or ROIIC. See how ROIIC differs from traditional ... Read Answer >>
  5. What is the difference between risk and opportunity cost?

    Learn the subtle differences between the concepts of risk and opportunity cost as well as how they impact your investment ... Read Answer >>
  6. How do you calculate the percentage gain or loss on an investment?

    Calculating the percentage change of your investment is quite easy. All it takes is a little bookkeeping and either a simple ... Read Answer >>
Related Articles
  1. Investing

    FYI On ROI: A Guide To Calculating Return On Investment

    Return on investment is a simple equation that can give you an edge when fine-tuning your portfolio - here's how to use it.
  2. Managing Wealth

    How to Calculate ROI For Real Estate Investments

    When it comes to real estate investments, there are two important ROI calculations to know.
  3. Small Business

    How To Calculate ROI Of A Marketing Campaign

    To make the most of your marketing spend, you need to know how to measure its results.
  4. Insights

    Movie Genres That Make The Most Money

    Success in Hollywood isn't just measured by ticket sales - development costs play a large part, too.
  5. Investing

    3 Ways To Evaluate the Performance of Alternatives

    Learn about three ways to measure the performance of alternative investments. See how the commonly used Sharpe ratio has drawbacks in measuring volatility.
  6. Investing

    Return on Investment (ROI) Vs. Internal Rate of Return (IRR)

    Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
  7. Investing

    5 Stock Market Metrics Explained

    Learn how to evaluate a company's performance using metrics such as ROE, EPS and P/E ratio.
  8. Investing

    Calculating The Gain Or Loss On An Investment

    Calculating the percentage of change in an investment is easy. Take the amount the investment gains and divide it by the amount invested.
  9. Financial Advisor

    3 Advantages of Momentum Investing

    Momentum investing, if performed professionally with a considerable amount of time invested, can offer high profits over shorter periods of times.
  10. Investing

    Where to Invest Your Money? 10 Steps to Financial Success

    Learn where to invest your money ten steps. Included is how to develop a proper investment plan, different investment products and brokerage options.
RELATED TERMS
  1. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  2. Capitalization Of Earnings

    A method of determining the value of an organization by calculating ...
  3. Investment Center

    A business unit that can utilize capital to directly contribute ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. Cash-On-Cash Return

    A rate of return often used in real estate transactions. The ...
  6. Average Return

    The simple mathematical average of a series of returns generated ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  5. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  6. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
Trading Center