Return on Investment (ROI) is a financial metric used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. ROI measures the amount of return on an 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; the result is expressed as a percentage or a ratio.
Historical Background
ROI is named after the term “return on investment” used in the 19th century. In the 19th century, the term “return on investment” was used to refer to the percentage of profit that a business made on an investment. For example, a business that made $1,000 on an investment would have a return on investment of 100%.
In the 19th century, the term “return on investment” was used to refer to the percentage of profit that a business made on an investment. For example, a business that made $1,000 on an investment would have a return on investment of 100%.
Calculation Formula
The ROI calculation is simple and straightforward, facilitating its widespread use across various types of investments. The formula is:
ROI = FV / IV * 100%
where:
FV is the final value of the investment,
IV is the initial value of the investment,
ROI is the return on investment,
Example Calculation
Suppose you initially invested $1,000 in a stock, and after one year, the value of the stock is $1,200. The ROI on your investment would be:
ROI = 1,200 / 1,000 * 100% = 200%
This means that your investment returned 200% of your initial investment, or $200 in profit.
Interpretation of Results
A positive ROI indicates that the investment was successful. A negative ROI indicates that the investment was not successful. The higher the ROI, the more efficient the investment was.
Limitations of ROI
It is important to note that ROI is a simple calculation and does not take into account other factors that may influence an investment’s return. For example, the cost of the investment may have changed over time, or the investment may have been made in a different currency.
Common FAQs
What is the difference between ROI and return on investment?
ROI is a financial metric used to evaluate the efficiency of an investment, while return on investment is a term used in the 19th century to refer to the percentage of profit that a business made on an investment.
What is the difference between an investment’s cost and its return?
The cost of an investment refers to the amount of money that is spent on the investment. The return of an investment refers to the amount of profit that is made from the investment. The cost and return of an investment are not the same thing.
What is the difference between an investment’s profit and its return?
The profit of an investment refers to the amount of profit that is made from the investment. The return of an investment refers to the percentage of profit that is made from the investment. The profit and return of an investment are not the same thing.
What is the difference between an investment’s risk and its return?
The risk of an investment refers to the amount of uncertainty that is associated with the investment. The return of an investment refers to the percentage of profit that is made from the investment. The risk and return of an investment are not the same thing.
What is the difference between an investment’s profit and its return?
The profit of an investment refers to the amount of profit that is made from the investment. The return of an investment refers to the percentage of profit that is made from the investment. The profit and return of an investment are not the same thing.