Return on Investment (ROI)
A performance measure used to evaluate the efficiency or profitability of an investment or to compare the efficiency of several different investments.
ROI directly measures the return on a particular investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio. This financial metric is widely used because of its versatility and simplicity; ROI can be applied to any investment with quantifiable returns. It is a crucial indicator for businesses and investors, used to gauge the potential profitability of various investments and help to make decisions about where to allocate resources.
A high ROI means the investment’s gains compare favorably to its cost. However, it's worth noting that ROI does not account for the time value of money and can be impacted by various factors, including the time period of holding the investment, taxes, and risk. Regardless, ROI remains a fundamental yardstick for assessing investment outcomes.
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