Return On Investment (ROI) Definition | Investopedia
Posted: September 14, 2015 at 5:02 am
DEFINITION of 'Return On Investment - ROI'
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investments 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.
The return on investment formula:
In the above formula, "Gain from Investment refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.
Return on investment is a very popular metric because of its versatility and simplicity. Essentially, return on investment can be used as a rudimentary gauge of an investments profitability. ROI can be very easy to calculate and to interpret and can apply to a wide variety of kinds of investments. That is, if an investment does not have a positive ROI, or if an investor has other opportunities available with a higher ROI, then these ROI values can instruct him or her as to which investments are preferable to others.
For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2010 and sold his shares for a total of $1,200 a year later. To calculate the return on his investment, he would divide his profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%.
With this information, he could compare the profitability of his investment in Slice Pizza with that of other investments. Suppose Joe also invested $2,000 in Big-Sale Stores Inc. in 2011 and sold his shares for a total of $2,800 in 2014. The ROI on Joes holdings in Big-Sale would be $800/$2,000, or 40%. Using ROI, Joe can easily compare the profitability of these two investments. Joes 40% ROI from his Big-Sale holdings is twice as large as his 20% ROI from his Slice holdings, so it would appear that his investment in Big-Sale was the wiser move.
Yet, examples like Joe's reveal one of several limitations of using ROI, particularly when comparing investments. While the ROI of Joes second investment was twice that of his first investment, the time between Joes purchase and sale was one year for his first investment and three years for his second. Joes ROI for his first investment was 20% in one year and his ROI for his second investment was 40% over three. If one considers that the duration of Joes second investment was three times as long as that of his first, it becomes apparent that Joe should have questioned his conclusion that his second investment was the more profitable one. When comparing these two investments on an annual basis, Joe needed to adjust the ROI of his multi-year investment accordingly. Since his total ROI was 40%, to obtain his average annual ROI he would need to divide his ROI by the duration of his investment. Since 40% divided by 3 is 13.33%, it appears that his previous conclusion was incorrect. While Joes second investment earned him more profit than did the first, his first investment was actually the more profitable choice since its annual ROI was higher.
Examples like Joes indicate how a cursory comparison of investments using ROI can lead one to make incorrect conclusions about their profitability. Given that ROI does not inherently account for the amount of time during which the investment in question is taking place, this metric can often be used in conjunction with Rate of Return, which necessarily pertains to a specified period of time, unlike ROI. One may also incorporate Net Present Value (NPV), which accounts for differences in the value of money over time due to inflation, for even more precise ROI calculations. The application of NPV when calculating rate of return is often called the Real Rate of Return.
Keep in mind that the means of calculating a return on investment and, therefore, its definition as well, can be modified to suit the situation. it all depends on what one includes as returns and costs. The definition of the term in the broadest sense simply attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.
For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its associated marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. When using ROI to assess real estate investments, one might use the initial purchase price of a property as the Cost of Investment and the ultimate sale price as the Gain from Investment, though this fails to account for all of the intermediary costs, like renovations, property taxes and real estate agent fees.
This flexibility, then, reveals another limitation of using ROI, as ROI calculations can be easily manipulated to suit the user's purposes, and the results can be expressed in many different ways. As such, when using this metric, the savvy investor would do well to make sure he or she understands which inputs are being used. A return on investment ratio alone can paint a picture that looks quite different from what one might call an accurate ROI calculationone incorporating every relevant expense that has gone into the maintenance and development of an investment over the period of time in questionand investors should always be sure to consider the bigger picture.
Recently, certain investors and businesses have taken an interest in the development of a new form of the ROI metric, called "Social Return on Investment,"or SROI. SROI was initially developed in the early 00's and takes into account social impacts of projects and strives to include those affected by these decisions in the planning of allocation of capital and other resources.
For a more in-depth look at ROI, see:FYI on ROI: A Guide to Calculating Return on Investment.
More here:
Return On Investment (ROI) Definition | Investopedia
- SoundCloud Gets Investment From Union Square, Index [Last Updated On: January 9th, 2011] [Originally Added On: January 9th, 2011]
- Investing News - Investment Articles - Investing Research [Last Updated On: September 14th, 2015] [Originally Added On: September 14th, 2015]
- InvestmentNews - The Investing News Source for Financial ... [Last Updated On: September 14th, 2015] [Originally Added On: September 14th, 2015]
- Investment management - Wikipedia, the free encyclopedia [Last Updated On: September 14th, 2015] [Originally Added On: September 14th, 2015]
- Investment - Wikipedia, the free encyclopedia [Last Updated On: September 14th, 2015] [Originally Added On: September 14th, 2015]
- Investment Education & Advice for Investors - Investment U [Last Updated On: September 14th, 2015] [Originally Added On: September 14th, 2015]
- Forbes - Investing Information and Investing News - Forbes.com [Last Updated On: September 15th, 2015] [Originally Added On: September 15th, 2015]
- Fidelity Investments - Retirement, Funds, and Online Trading [Last Updated On: September 15th, 2015] [Originally Added On: September 15th, 2015]
- Investment | Define Investment at Dictionary.com [Last Updated On: September 15th, 2015] [Originally Added On: September 15th, 2015]
- Investment Definition | Investopedia [Last Updated On: September 15th, 2015] [Originally Added On: September 15th, 2015]
- Find what type of investment is right for you - INVESTMENTS [Last Updated On: September 15th, 2015] [Originally Added On: September 15th, 2015]
- Investopedia - Educating the world about finance [Last Updated On: September 20th, 2015] [Originally Added On: September 20th, 2015]
- Investment, Mutual Funds, ETFs & Stocks | Bankrate.com [Last Updated On: September 26th, 2015] [Originally Added On: September 26th, 2015]
- Gold as an investment - Wikipedia, the free encyclopedia [Last Updated On: October 4th, 2015] [Originally Added On: October 4th, 2015]
- Green Card Through Investment | USCIS [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- What is Investment ? Meaning and Types of Investment [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Host.al - Albanian Domain AL Accredited Registrar [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Alpha Investment Plan - Alpha Bank Albania [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- RealEstate.al - Apartment-Villa-Office For rent or for sale ... [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Attractiveness of foreign investments in Albania [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- INVESTMENT CLIMATE | Embassy of the Republic of Albania in Japan [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Princip.al :: Welcome to Princip.al [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Foreign direct investment - Wikipedia, the free encyclopedia [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment Moats Wealth Mentor for Financial Independence [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment | Nicole Gesmondi Photographer, LLC [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- investment - Thesaurus.com [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- What is Investment? | eHow [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment banking - Wikipedia, the free encyclopedia [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment Jobs on CareerBuilder.com [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Articles about Investment - timesofindia-economictimes [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment Definition - What is Investment? [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investing Basics | Investor.gov [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investing.com - Stock Market Quotes & Financial News [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Best Investments Good Investments in 2015 and Beyond [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment Calculators [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Investment: a key concept in Economics [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- SEC.gov | Investment Companies [Last Updated On: January 22nd, 2016] [Originally Added On: January 22nd, 2016]
- Careers-in-Investment-Banking.com: Your Guide to ... [Last Updated On: February 8th, 2016] [Originally Added On: February 8th, 2016]
- Investment Property and Investment Real Estate For Sale [Last Updated On: February 8th, 2016] [Originally Added On: February 8th, 2016]
- Investment and Sustainable Development [Last Updated On: February 16th, 2016] [Originally Added On: February 16th, 2016]
- Investment Images - Photos - Pictures - CrystalGraphics [Last Updated On: February 16th, 2016] [Originally Added On: February 16th, 2016]
- Investment - Simple English Wikipedia, the free encyclopedia [Last Updated On: February 20th, 2016] [Originally Added On: February 20th, 2016]
- Types of Investments - MoneySENSE [Last Updated On: February 20th, 2016] [Originally Added On: February 20th, 2016]
- Smart Ways to Invest Your Money and Minimize Risks [Last Updated On: February 22nd, 2016] [Originally Added On: February 22nd, 2016]
- Investing in Mining Stocks, Metals and Commodities ... [Last Updated On: February 22nd, 2016] [Originally Added On: February 22nd, 2016]
- What is Investment Banking? (with picture) [Last Updated On: February 22nd, 2016] [Originally Added On: February 22nd, 2016]
- Investments - The New York Times [Last Updated On: March 17th, 2016] [Originally Added On: March 17th, 2016]
- investment - English-Spanish Dictionary - WordReference.com [Last Updated On: March 20th, 2016] [Originally Added On: March 20th, 2016]
- Investment fund - Wikipedia, the free encyclopedia [Last Updated On: March 20th, 2016] [Originally Added On: March 20th, 2016]
- What Is An Investment Bank - An Intro To Investment Banks [Last Updated On: May 10th, 2016] [Originally Added On: May 10th, 2016]
- Investment Property Advisors - Home [Last Updated On: May 10th, 2016] [Originally Added On: May 10th, 2016]
- Investment Savings Bank [Last Updated On: May 10th, 2016] [Originally Added On: May 10th, 2016]
- US Investment Report [Last Updated On: May 10th, 2016] [Originally Added On: May 10th, 2016]
- Investment House [Last Updated On: May 10th, 2016] [Originally Added On: May 10th, 2016]
- Best investments - 10 steps to investing money | uSwitch [Last Updated On: May 17th, 2016] [Originally Added On: May 17th, 2016]
- investment - The Motley Fool [Last Updated On: May 17th, 2016] [Originally Added On: May 17th, 2016]
- How to Invest Small Amounts of Money Wisely: 12 Steps [Last Updated On: May 17th, 2016] [Originally Added On: May 17th, 2016]
- Investing with us | HSBC UK [Last Updated On: May 17th, 2016] [Originally Added On: May 17th, 2016]
- Investment Risks | Consumer Information [Last Updated On: June 27th, 2016] [Originally Added On: June 27th, 2016]
- Invest In Shipping Containers | Invest Containers [Last Updated On: July 1st, 2016] [Originally Added On: July 1st, 2016]
- Investment - Trade - European Commission [Last Updated On: July 10th, 2016] [Originally Added On: July 10th, 2016]
- investment | finance | Britannica.com [Last Updated On: August 15th, 2016] [Originally Added On: August 15th, 2016]
- What does investment mean? definition, meaning and ... [Last Updated On: August 17th, 2016] [Originally Added On: August 17th, 2016]
- Investment Options | Investment Plans in India | Online ... [Last Updated On: August 17th, 2016] [Originally Added On: August 17th, 2016]
- Investment Returns [Last Updated On: August 17th, 2016] [Originally Added On: August 17th, 2016]
- The Mental Health Benefits of Exercise: The Exercise ... [Last Updated On: July 8th, 2017] [Originally Added On: July 8th, 2017]
- PayPal co-founder launches firm to raise investment funds for SpaceX, report says - Los Angeles Times [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- Bitcoin Investment Vehicle Adopts Open Strategy Ahead of Blockchain Fork - CoinDesk [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- How to Spot a Good Investment in a Changing Neighborhood - Mansion Global [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- SoftBank Vision Fund investments so far - CNBC.com - CNBC [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- Vanguard's new chief investment officer has a warning for investors - The Denver Post [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- MARKET MATTERS: When life throws a curveball at your investment timeline - New Haven Register [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- Investment prosperity can make investors complacent - The Seattle Times [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- Risky business: Keeping an eye on Chinese investment - POLITICO.eu [Last Updated On: July 30th, 2017] [Originally Added On: July 30th, 2017]
- Somaliland secures record $442m foreign investment deal - CNN [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]
- China isn't discouraging overseas investment, only regulating it, Beijing-backed think tanker says - CNBC [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]
- China issues rules to curb state firms' overseas investment risks - Reuters [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]
- Unilever's Latest Investment Targets New Route into Homes - Fortune [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]
- Hundreds of jobs, $139 million investment planned in Morgan County by major companies - whnt.com [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]
- Apple's R&D Investment Hits New High as Percentage of Sales - Motley Fool [Last Updated On: August 2nd, 2017] [Originally Added On: August 2nd, 2017]