Term: "Return on Investment (ROI)"
Definition
Return on Investment (ROI) is a crucial financial ratio that calculates the profitability of an investment by comparing the gain (or loss) from the investment to its cost. It is expressed as a percentage and is used to assess the effectiveness and potential return of various types of investments, from financial and real estate investments to business projects and marketing campaigns.
The formula to calculate ROI is:
ROI=(Net Profit / Cost of Investment) × 100
Where Net Profit is the total earnings from the investment minus the costs associated with making the investment.
ROI is widely used due to its simplicity and versatility, providing a clear, quantifiable measure of investment performance that can be used to compare the efficiency of several investments or to gauge the profitability of a single investment over time. A higher ROI indicates a more profitable investment relative to its cost, making it a valuable tool for investors, business owners, and managers in making informed decisions about where to allocate resources to maximize returns. However, it's important to consider that ROI does not account for the time value of money or investment risks, which can also impact investment decisions.