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What is return on investment?

 

Return on Investment (ROI) is a metric used to assess an investment’s performance and/or compare different investment opportunities in a standardized manner.  The formula for ROI is as follows:

 

vig.io ROI

 

ROI is usually expressed as a percentage, with a positive percentage indicating an investment that returns more capital than invested and a negative percentage indicating an investment that does not return as much capital as invested. 

 

For example, Johnny and Jane invest $50 dollars of their savings to start a lemonade stand outside their home.  This $50 is considered the Cost of the Investment.  Over the course of their first week of operation, they have sales of $75.  This $75 is the Current Value of the Investment.  So, for their first week in operation, their ROI was as follows:

 

 

vig.io ROI

 

 

With an ROI of 50%, this proved to be a good investment by Johnny and Jane.

 

ROI is a favored metric of financial analysts for its ease of use, but it does have its limitations.  For example, ROI does not consider time as a component of the equation, namely how long an investment will take to generate a specific ROI (Rate of Return performs this function quite well.).  In addition, because it focuses on the percentage instead of an actual dollar value, it does not indicate the potential size of the return.