Finance Dictionary
Return on Investment (ROI)
Definition
A performance measure used to evaluate the efficiency of an investment.
Deep Dive
Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It measures the amount of return on an investment relative to the investment's cost. The basic formula for ROI is straightforward: (Net Profit / Cost of Investment) x 100%. This metric helps investors and businesses understand how much gain they received compared to what they spent, providing a clear percentage that indicates the success or failure of a venture.
Examples & Use Cases
- 1A company invests $50,000 in a new software system that results in $75,000 in cost savings and increased revenue. The ROI would be (($75,000 - $50,000) / $50,000) * 100% = 50%.
- 2Purchasing a rental property for $300,000 that generates $30,000 in net rental income annually, yielding an annual ROI of 10%.
Related Terms
ProfitabilityCapital BudgetingNet Present Value (NPV)