Return on Investment (ROI)

What is Return on Investment (ROI)?

Return on Investment, or ROI, is a performance measure used to evaluate the efficiency or profitability of an investment. It's the ratio of money gained or lost on an investment relative to the amount of money invested.

Why ROI is Used?

ROI is used to determine the return on an investment relative to its cost. It’s a universal measure for assessing the profitability of various financial endeavors, and guiding decisions in business expansions, stock market investments, or project funding.

Why is ROI Important?

ROI is crucial because it gives a clear indicator of the financial returns from an investment. It aids in benchmarking the success of one investment against others and helps in strategic planning and resource allocation based on expected returns.

How Does ROI Work?

ROI is typically calculated by dividing the net profit of an investment by the initial cost. It's used in various sectors like finance, real estate, business analysis, and anywhere one needs to assess the value generated by an investment.

Key Takeaways/Elements:

• Benchmarking Tool: ROI provides a standard for comparing the profitability of different investments.
• Performance Indicator: It's a measure of the money returned on an investment relative to its cost.
• Strategic Planning: ROI informs strategic business decisions by quantifying potential returns.

Real-World Example of its Implementation:

An investor buys shares at $1,000 total and sells them for $1,200. The net profit is $200, and the ROI is 20%. This numerical result helps the investor to assess the effectiveness of the investment.

Use Cases:

• Budget Allocation: Companies use ROI to decide how to allocate their budget for maximum profitability.
• Project Feasibility: Before embarking on projects, businesses calculate potential ROI to determine feasibility.
• Investment Comparison: ROI helps investors compare the potential returns from various investment opportunities.