Return On Investment (ROI)
Return on Investment (ROI)Â is a metric used to evaluate the efficiency and profitability of an investment. It measures the return or profit generated relative to the investment’s cost.
The formula to calculate ROI is:
Where:
- Net Profit is the total revenue from the investment minus the total cost of the investment.
- Cost of Investment is the initial amount invested.
For example, if you invest $100,000 in a project and the investment generates $150,000 in revenue, with $50,000 being the net profit:
This means that the investment generated a 50% return on the initial amount invested.
ROI is widely used because it provides a straightforward measure of the profitability and efficiency of an investment, allowing investors and businesses to compare different investment opportunities and make informed decisions.