What is 'Return On Investment  ROI'
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio.
The return on investment formula:
In the above formula, "Gain from Investment” refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.
BREAKING DOWN 'Return On Investment  ROI'
Return on investment is a very popular metric because of its versatility and simplicity. Essentially, return on investment can be used as a rudimentary gauge of an investment’s profitability. ROI can be very easy to calculate and to interpret and can apply to a wide variety of kinds of investments. That is, if an investment does not have a positive ROI, or if an investor has other opportunities available with a higher ROI, then these ROI values can instruct him or her as to which investments are preferable to others.
For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2010 and sold his shares for a total of $1,200 a year later. To calculate the return on his investment, he would divide his profits ($1,200  $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%.
With this information, he could compare the profitability of his investment in Slice Pizza with that of other investments. Suppose Joe also invested $2,000 in BigSale Stores Inc. in 2011 and sold his shares for a total of $2,800 in 2014. The ROI on Joe’s holdings in BigSale would be $800/$2,000, or 40%. Using ROI, Joe can easily compare the profitability of these two investments. Joe’s 40% ROI from his BigSale holdings is twice as large as his 20% ROI from his Slice holdings, so it would appear that his investment in BigSale was the wiser move.
Limitations of ROI
Yet, examples like Joe's reveal one of several limitations of using ROI, particularly when comparing investments. While the ROI of Joe’s second investment was twice that of his first investment, the time between Joe’s purchase and sale was one year for his first investment and three years for his second. Joe’s ROI for his first investment was 20% in one year and his ROI for his second investment was 40% over three. If one considers that the duration of Joe’s second investment was three times as long as that of his first, it becomes apparent that Joe should have questioned his conclusion that his second investment was the more profitable one. When comparing these two investments on an annual basis, Joe needed to adjust the ROI of his multiyear investment accordingly. Since his total ROI was 40%, to obtain his average annual ROI he would need to divide his ROI by the duration of his investment. Since 40% divided by 3 is 13.33%, it appears that his previous conclusion was incorrect. While Joe’s second investment earned him more profit than did the first, his first investment was actually the more profitable choice since its annual ROI was higher.
Examples like Joe’s indicate how a cursory comparison of investments using ROI can lead one to make incorrect conclusions about their profitability. Given that ROI does not inherently account for the amount of time during which the investment in question is taking place, this metric can often be used in conjunction with Rate of Return, which necessarily pertains to a specified period of time, unlike ROI. One may also incorporate Net Present Value (NPV), which accounts for differences in the value of money over time due to inflation, for even more precise ROI calculations. The application of NPV when calculating rate of return is often called the Real Rate of Return.
Keep in mind that the means of calculating a return on investment and, therefore, its definition as well, can be modified to suit the situation. it all depends on what one includes as returns and costs. The definition of the term in the broadest sense simply attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.
For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its associated marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. When using ROI to assess real estate investments, one might use the initial purchase price of a property as the “Cost of Investment” and the ultimate sale price as the “Gain from Investment,” though this fails to account for all of the intermediary costs, like renovations, property taxes and real estate agent fees.
This flexibility, then, reveals another limitation of using ROI, as ROI calculations can be easily manipulated to suit the user's purposes, and the results can be expressed in many different ways. As such, when using this metric, the savvy investor would do well to make sure he or she understands which inputs are being used. A return on investment ratio alone can paint a picture that looks quite different from what one might call an “accurate” ROI calculation—one incorporating every relevant expense that has gone into the maintenance and development of an investment over the period of time in question—and investors should always be sure to consider the bigger picture.
Developments in ROI
Recently, certain investors and businesses have taken an interest in the development of a new form of the ROI metric, called "Social Return on Investment," or SROI. SROI was initially developed in the early 00's and takes into account social impacts of projects and strives to include those affected by these decisions in the planning of allocation of capital and other resources.
For a more indepth look at ROI, see: FYI on ROI: A Guide to Calculating Return on Investment.

Nominal GDP
A gross domestic product (GDP) figure that has not been adjusted ... 
Investment Center
A business unit that can utilize capital to directly contribute ... 
Pig
An investor who is often seen as greedy, having forgotten his ... 
Investing
The act of committing money or capital to an endeavor with the ... 
Asset Redeployment
The strategic relocation of assets from a less valued, or less ... 
Return Of Capital
A return from an investment that is not considered income. The ...

Active Trading
FYI On ROI: A Guide To Calculating Return On Investment
Return on investment is a simple equation that can give you an edge when finetuning your portfolio  here's how to use it. 
Investing Basics
How to Calculate ROI For Real Estate Investments
When it comes to real estate investments, there are two important ROI calculations to know. 
Home & Auto
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. ... 
Investing
Figuring What You Make On Rental Property (ROI)
The return on investment can vary greatly, depending on how much of the building you own. 
Home & Auto
How To Calculate ROI For Real Estate Investments
Calculating return on real estate investments can be difficult. We help you figure it out. 
Personal Finance
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. 
Savings
College Tuition vs. Investing: Is It Worth It?
With the rising cost of college and questionable career prospects awaiting college graduates, some are wondering if a college education is still worth it. 
Professionals
8 College Degrees with the Best Returns on Investment
Find out which college degrees offer the best opportunities to earn a salary that can generate a solid return on your investment in education. 
Investing Basics
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. 
Fundamental Analysis
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).

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 >> 
How can return on investment (ROI) calculations be manipulated?
Check out an example of how the return on investment (ROI) for similar investments can vary greatly, depending on how the ... Read Answer >> 
Why is return on investment (ROI) a bad measure for calculating longterm investments?
Return on investment (ROI) is a useful valuation tool, but it lacks meaning for longterm investments. Read Answer >> 
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 >> 
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 >> 
How does JIT (just in time) production affect ROI (return on investment)?
Learn about the "just in time" production strategy and how this ondemand system affects return on investment by reducing ... Read Answer >>