Return on Investment

Return on investment (ROI) is a performance measure that is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI also refers to the monetary benefits derived from having spent money on developing or revising a system. It is the income that an investment provides in a year. The ROI measures how effectively the firm uses its capital to generate profit. The higher the ROI, the better it is for the company. It is also known as rate of return, rate of profit or just return.

The amount of money gained or lost in the ROI can be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be an asset, capital, principal, or the cost basis of the investment. ROI as a ratio is usually expressed as a percentage. The ROI is calculated as, the benefit (return) of an investment divided by the cost of the investment. The result is expressed as a percentage or a ratio. The formula is:

The ‘gains from investment’ refers to the proceeds obtained from selling the investment of interest.  Return on investment is an essential and a popular metric because of its versatility and simplicity. Therefore if an investment does not have a positive ROI or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Dividend returns are a type of ROI that entail all investors getting a guaranteed return on investment based on the success of the company and regardless of investment amount. Cash returns are also similar to dividend returns but here each investor gets a different rate of return based on the amount of investment which is also known as shares, they provided.

Questions

• What is return on investment?
• How is ROI useful in choosing an investment?