Return on Investment (ROI) refers to a key financial metric used to evaluate the profitability and efficiency of an investment. In essence, ROI calculates the return of an investment relative to its initial cost, helping investors and businesses decide whether projects or ventures are economically worthwhile.
Calculating ROI involves a straightforward formula:
ROI (%) = [(Net Profit) ÷ (Cost of Investment)] × 100
If an investment generates a high ROI, it's typically viewed as effective, while a negative or low ROI suggests inadequate returns compared to its costs. For instance, if you invest $1,000 in a marketing campaign and it yields a net profit of $1,500, your ROI would be:
ROI = [(1,500 - 1,000) ÷ 1,000] × 100 = 50%
Businesses leverage ROI to prioritize projects, justify expenses, and optimize resources. Investors similarly utilize ROI to measure the performance of their investment portfolios and inform future investment decisions. While ROI is a useful measurement tool, it should always be considered alongside other financial metrics for comprehensive investment assessment and decision-making.
