Return on Investment (ROI)
Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment. It measures the gain or loss generated by an investment relative to its cost. ROI is expressed as a percentage, making it easy to compare the profitability of different investments.
What is the formula to calculate the ROI?
The basic formula to calculate the ROI is:
ROI = (Net Profit/Cost of Investment) x 100
Net Profit is the total revenue from the investment - Total cost
Cost of investment = Initial amount invested
A positive ROI indicates more returns from the investment than its cost, which means its
profitable.
But, a negative ROI indicates loss as returns are less than the cost.
Hence, ROI allows the investors to compare the efficiency of their investment regardless
of the amount they have invested.
What is the importance of ROI?
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Helps investors make important investment decisions.
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ROI helps measure performance of the investment over a time period.
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Helps understand the resource allocation by identifying the most profitable projects/investments.
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The value of ROI helps companies compare their growth and performance with the industry standards.
What factors affect the ROI?
There are various factors that affect the ROI:
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Duration of the investment.
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Conditions of the market when the investment was made.
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The costs associated with the investment also affects ROI.
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The overall returns generated by the investment should be counted in.