The standard yardstick for whether an investment was worth it. ROI lets you compare apples to oranges - a marketing campaign against a piece of equipment against a new hire - in the same units.
Definition
ROI (Return on Investment) - the profit (or return) generated by an investment relative to its cost, expressed as a percentage. ROI = (Profit ÷ Investment Cost) × 100%.
Formula
ROI = (Profit from investment ÷ Cost of investment) × 100% Example: $10,000 investment generated $3,000 profit. ROI = ($3,000 ÷ $10,000) × 100% = 30%.
Common uses
- Investment comparison - which use of capital produces more return?
- Post-investment evaluation - did this campaign or purchase pay back?
- Resource allocation - directing budget toward higher-ROI activities
Watch out
Basic ROI ignores time. A 50% ROI over five years isn't the same as a 50% ROI over six months. Use annualized ROI or IRR when time matters.