The formula for Return on Investment (ROI) is a simple calculation used to assess the profitability of an investment.
Understanding ROI
Return on Investment (ROI) is an approximate measure of an investment's profitability. It's a popular metric because of its simplicity and versatility. ROI helps evaluate the efficiency of an investment by directly comparing the amount of return to the investment's cost.
The ROI Formula
According to the reference, ROI is calculated as follows:
*(Final Value of Investment - Initial Cost of Investment) / Cost of Investment 100**
Expressed as a formula:
ROI = ((Final Value - Initial Cost) / Initial Cost) * 100
Here's a breakdown:
| Term | Description |
|---|---|
| Final Value | The total value of the investment at the end of the period. |
| Initial Cost | The original cost of the investment. |
Example
Let's say you invest $1,000 in a stock. After one year, the stock is worth $1,200. Your ROI would be:
ROI = (($1,200 - $1,000) / $1,000) * 100 = 20%
This means you earned a 20% return on your initial investment.
Practical Insights
- Wide Range of Uses: ROI is applicable across various investment types, including stocks, real estate, and business ventures.
- Benchmarking: ROI can be used to compare the profitability of different investments.
- Performance Measurement: ROI helps in evaluating the performance of an investment over time.
