What is ROI?

Return on Investment (ROI) is a key financial metric used to measure the profitability of an investment relative to its cost. It helps businesses and investors assess how efficiently their money is being used. A higher ROI indicates a more profitable investment.

How to Calculate ROI

The formula for ROI is:

ROI = ((Net Profit / Cost of Investment) × 100)%

This formula shows how much return you earn for every dollar spent.

Example Calculation

Imagine you invest $1,000 in a project, and it generates $2,700 in revenue. Your net profit is:

Net Profit = Revenue - Cost of Investment
= 2,700 - 1,000 = 1,700

Now, apply the formula:

ROI = (1,700 / 1,000) × 100% = 170%

This means you gained 170% profit on your initial investment.

Why ROI Matters

ROI is widely used in various fields, including:

✅ Investment Decisions - Investors compare different opportunities to choose the best one.
✅ Business Strategy - Companies analyze projects and marketing efforts to optimize profits.
✅ Performance Tracking - Businesses measure their financial health over time.

Things to Consider

While ROI is a great metric, it has some limitations:

It doesn’t consider time - Two investments with the same ROI may have different timeframes.
It ignores risk factors - A high ROI doesn’t always mean a low-risk investment.
It may overlook hidden costs - Maintenance, training, and operational costs should be factored in.