What is return on investment (ROI)

Beginner
March 29, 2023
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3m

Return on investment (ROI) is a financial index used to calculate the profitability and efficiency of an investment. ROI is expressed as a percentage and is calculated by dividing an investment's net profit or loss by its initial cost.

There are two formulas for calculating ROI, with the first being the most common:

1.
ROI = (Net income / Cost of investment) x 100

2. ROI = (Investment Gain / Investment Base) x 100

Let’s assume that you spend $
1,000 on a digital asset and later on sell it for $3,000 - in this case, your ROI is 200%.


Of course, it is important to consider uncertainty and market changes for future predictions. Investment is never risk-free, but ROI is an excellent method to evaluate the monetary efficiency of your investments.

How is ROI helpful?

From an investor's point of view, ROI is beneficial for several reasons.


First, ROI is relatively simple to calculate, as only two numbers are needed: investment cost and profit. It is also easy to comprehend and makes an excellent measure of the general profitability of investments when comparing several assets.


ROI is also valuable for analyzing business performance. Calculating ROI helps determine whether a business is likely to be profitable. This result may also be compared to the performance of other relevant companies, and based on this, an investment decision can be made.


From a business point of view, ROI makes it possible to identify sectors that need to be corrected and improved. If the ROI turns out to be lower than anticipated, this implies that the project could be improved in some areas.


Additionally, ROI only measures financial gains and does not account for non-monetary benefits. For example, an industry report might generate only a few sales but solidify a company’s expertise in the market. New office rooms might not directly enhance revenue but significantly increase employee satisfaction. Some people use so-called soft ROI to calculate non-tangible gains and hard ROI to measure monetary gains.

Summary

Return on Investment (ROI) is a financial index used to evaluate the profitability and efficiency of investments, expressed as a percentage. It is calculated by dividing net income or investment gain by the investment cost. As a relatively easy method, ROI is an excellent tool for comparing the general profitability of investments.


ROI can also help businesses identify improvement areas and assess the efficiency of marketing campaigns based on paid ads, but it does not account for non-monetary benefits.

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