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. How do you calculate return on investment (ROI)?

    Find out how to calculate return on investment, or ROI, for your portfolio, and learn why it is considered so valuable in ... 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 do managers measure human capital?

    Learn what human capital is, how managers measure it and how managers measure human capital's return on investment to gauge ... Read Answer >>
  4. 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 >>
  5. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
  6. What is the most important section in an investment company's prospectus?

    Learn about the various elements included in an investment company's prospectus and which ones are most important for investors ... 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. Financial Advisor

    How To Calculate Return On Investment (ROI)

    Return on investment allows an investor to evaluate the performance of an investment and compare it to others in his or her portfolio. Find out how to calculate ROI and how to use to your advantage. ...
  4. 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.
  5. 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.
  6. 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.
  7. Financial Advisor

    How to Increase ROI with Financial Planning Software

    Here are five strategies to increase ROI via financial planning software in the wake of the fiduciary rule.
  8. 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).
  9. Managing Wealth

    Which MBAs Offer A Good Return On Investment?

    There are a lot of factors to consider when selecting a school for your MBA, not the least is when you will see a return on your investment.
  10. Investing

    5 Stock Market Metrics Explained

    Learn how to evaluate a company's performance using metrics such as ROE, EPS and P/E ratio.
RELATED TERMS
  1. Investment Center

    A business unit that can utilize capital to directly contribute ...
  2. Cash-On-Cash Return

    A rate of return often used in real estate transactions. The ...
  3. Opportunity Cost

    1. The cost of an alternative that must be forgone to pursue ...
  4. Average Return

    The simple mathematical average of a series of returns generated ...
  5. Capital Investment Factors

    Factors affecting the decisions surrounding capital investment ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present ...
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center