Return On Investment - ROI

AAA

DEFINITION of '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. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

 

Return On Investment (ROI)

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

INVESTOPEDIA EXPLAINS 'Return On Investment - ROI'

Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just 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 respective 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.

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.

There's so much more to understand about the ROI. Read FYI on ROI: A Guide to Calculating Return on Investment

VIDEO

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Return On Capital Employed (ROCE)

    A financial ratio that measures a company's profitability and ...
  3. Active Return

    The percentage gain or loss of an investment relative to the ...
  4. After-Tax Real Rate Of Return

    The actual financial benefit of an investment after accounting ...
  5. Return on Average Capital Employed ...

    A financial ratio that shows profitability compared to investments ...
  6. Nominal Rate Of Return

    The amount of money generated by an investment before expenses ...
Related Articles
  1. Investing

    The interest rate used to define the “risk-free” rate of return is the:

    a. discount rate.b. 90-day Treasury bill rate.c. five-year Treasury note rate.d. federal funds rate. Answers: bThe 90-day Treasury bill rate is used because there is no credit risk, and the maturity ...
  2. Investing

    What is the difference between stated annual return and effective annual return?

    Essentially, the effective annual return accounts for intra-year compounding, and the stated annual return does not. The difference between these two measures is best illustrated with an example. ...
  3. 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 fine-tuning your portfolio - here's how to use it.
  4. Bonds & Fixed Income

    Unpredictable Event Or Bad Investment?

    When investments head south, your 20/20 hindsight can show you who's at fault.
  5. Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  6. By interpreting a solvency ratio, an analyst or investor can gain insight into how likely a company will be to continue meeting its debt obligations.
    Fundamental Analysis

    Analyzing Investments With Solvency Ratios

    Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its long-term obligations; but like most financial ratios, they must be used in the context of an overall company ...
  7. Personal Finance

    Does Your Investment Manager Measure Up?

    These key stats will reveal whether your advisor is a league leader or a benchwarmer.
  8. Fundamental Analysis

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  9. Investing Basics

    What are the main differences between return on equity (ROE) and return on assets (ROA)?

    Return on equity (ROE) and return on assets (ROA) are two of the most important measures for evaluating how effectively a company's management team is managing the capital that shareholders entrust ...
  10. Investing Basics

    What are the main differences between compound annual growth rate (CAGR) and internal rate of return ...

    The compound annual growth rate (CAGR), measures the return on an investment over a certain period of time. The internal rate of return, or IRR, also measures investment performance but is more ...

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center