What is Return on Investment?
Return on Investment (ROI) measures the profitability and effectiveness of an investment by comparing the gain or loss relative to its cost. ROI is a key performance metric used to evaluate the financial return of investments and design decisions, helping stakeholders assess whether the investment delivers the expected benefits and value.
Calculating ROI:
- Formula: ROI = (Net Profit / Cost of Investment) × 100
- Net Profit: The gain or loss resulting from the investment.
- Cost of Investment: The initial expenditure required for the investment.
For instance, if a company invests $10,000 in a new marketing campaign and generates $15,000 in additional revenue, the ROI would be 50%. This metric provides insight into the effectiveness of investments and helps guide future decision-making by highlighting which strategies yield the best returns.