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Definition

Return on Investment (ROI)

Return on investment (ROI) is a performance indicator often used to assess an investment's efficiency or revenue, as well as to evaluate the efficiency of many assets. It aims to precisely evaluate the profit generated on a specific investment concerning its expenditure.

It refers to the measure of management’s effectiveness in utilizing assets at its disposal in an investment center. The profit out of an investment is divided by the cost of the investment to compute ROI. A percentage or a fraction is used to represent ROIs in general. So the formula stands - 

         

                          Current Value of investment - Cost of investment

ROI =       ------------------------------------------------------------------------- 

                                                  Cost of investment

 

The formula itself isn't very difficult, and it's simple to comprehend and simpler to implement for a broad array of applications. If the result is positive, the investment is beneficial. These indications, on the other hand, can assist investors to reject or pick the best possibilities if all other chances with greater ROIs are readily accessible. Investors should also avoid negative outcomes, that indicate a massive loss.

The most prominent advantage of ROI is that it is a straightforward statistic that is computationally simple. Because of its simplicity, the return on investment (ROI) is frequently employed as a general measure of financial performance. It has the same meanings in every application, it is unlikely to be misconstrued or misread as an estimation.

 

For example, let's say, Stella put $2000 into XYZ Art & Crafts in 2018 and sold the stock for $2,500 a year afterward. Divide the net earnings ($2500- $2,000 = $500) by the initial cost ($2000) to get a ROI of $500/$2,000, or 25%.

 

Use of the Term in Sentences

  • The Return on Investment (ROI) focuses solely on financial advantages and excludes any secondary benefits.

 

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