Understanding ROI (Return on Investment)

Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It measures the return of an investment relative to its cost. The higher the ROI, the better the investment performed.

How to Calculate ROI

The basic ROI formula is: (Gain from Investment - Cost of Investment) / Cost of Investment × 100

For example, if you invest $5,000 and receive $7,500 back, your ROI would be: ($7,500 - $5,000) / $5,000 × 100 = 50%

Understanding Annualized ROI

Annualized ROI adjusts your return to show what it would be if you held the investment for exactly one year. This is useful for comparing investments of different time periods. A 50% return in 6 months is much better than 50% over 5 years.

When to Use ROI Calculations

• Evaluating business investments or projects
• Comparing different investment opportunities
• Measuring the success of marketing campaigns
• Analyzing real estate investments
• Assessing stock portfolio performance

Limitations of ROI

While ROI is a useful metric, it doesn't account for:

• The time value of money (unless annualized)
• Risk factors associated with the investment
• Hidden costs or ongoing expenses
• Opportunity costs