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Return on Investment (ROI)

Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment by comparing the gain or loss from the investment to its cost. It is calculated by dividing the net profit from the investment by the initial investment cost and multiplying by 100 to express it as a percentage. ROI helps investors and businesses determine the efficiency of an investment and compare different investment opportunities.

Example

An investor spends $10,000 to purchase stock, which later sells for $12,000, resulting in a net gain of $2,000. The ROI is 20%, calculated as ($2,000 / $10,000) * 100.

Key points

• A metric for evaluating the profitability of an investment.

• Calculated as (net profit / investment cost) * 100.

• Helps compare the efficiency of different investments.

Quick Answers to Curious Questions

It provides a simple measure of profitability, helping investors assess the return potential of various investment opportunities.

By expressing returns as a percentage, ROI allows investors to easily compare the profitability of different investments regardless of size.

ROI does not account for the time value of money or the risk associated with an investment, making it less comprehensive than other metrics like NPV or IRR.