Return on Investment (ROI)
Definition
A performance measure used to evaluate the profitability of an investment, expressed as a percentage of the original cost.
Formula
ROI = ((Current Value - Cost) / Cost) × 100Return on Investment measures the gain or loss generated on an investment relative to its cost. It is one of the most widely used profitability metrics because of its simplicity and versatility. A positive ROI indicates the investment gained value, while a negative ROI means it lost money.
ROI is used across many contexts: investors evaluate stock performance, businesses assess marketing campaigns, real estate investors analyze property returns, and individuals measure the value of education or career investments.
While ROI is useful for quick comparisons, it has limitations. It does not account for the time value of money, meaning a 50% return over one year is very different from a 50% return over ten years. For time-adjusted comparisons, annualized ROI or the internal rate of return (IRR) provides a more accurate picture.
Related Calculators
Related Terms
Capital Gains
financeThe profit earned from selling an asset for more than its purchase price, subject to taxation at different rates depending on how long the asset was held.
Compound Interest
financeInterest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow exponentially over time.
Dividend
financeA payment made by a corporation to its shareholders, usually from profits, distributed as cash or additional shares of stock.
P/E Ratio (Price-to-Earnings)
financeA valuation metric that compares a company's current stock price to its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
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