Return on Investment (ROI) is a financial metric that measures the profitability of an investment by comparing the gain or loss generated relative to the amount of money invested. ROI is expressed as a percentage and is used to evaluate the efficiency of an investment or to compare the profitability of multiple investments. The formula for calculating ROI is:

ROI=(Cost of InvestmentNet Profit)×100

For example, if an investor spends $10,000 on a stock and later sells it for $12,000, the ROI would be:

ROI=(10,00012,000−10,000)×100=20%

A positive ROI indicates that the investment has generated a profit, while a negative ROI indicates a loss. ROI is a widely used metric in both personal finance and business, as it provides a straightforward way to assess the return on investment relative to its cost. Investors and businesses use ROI to make decisions about where to allocate capital, comparing the potential returns of different investment opportunities or projects.

ROI is also used in various contexts beyond traditional investments, such as marketing, real estate, and corporate finance. For example, a company may calculate the ROI of a marketing campaign by comparing the revenue generated by the campaign to its cost. Similarly, a real estate investor might use ROI to evaluate the profitability of purchasing a rental property by comparing the rental income and property appreciation to the initial investment and ongoing expenses.

While ROI is a valuable metric for assessing profitability, it has limitations. ROI does not account for the time value of money, which means it does not consider the length of time an investment is held. As a result, two investments with the same ROI may have different levels of attractiveness if one requires a longer time to achieve the return. Additionally, ROI does not account for risk, and investments with higher potential returns may also carry higher risks. To make more informed decisions, investors and businesses may use ROI in conjunction with other financial metrics, such as Internal Rate of Return (IRR), Net Present Value (NPV), and risk-adjusted return measures.