ROI – Explained + Formula + Examples

Return on Investment (ROI) is a financial metric that measures the amount of return, or profit, an investor receives on their investment, relative to the cost of the investment. It is often expressed as a percentage, and is used to evaluate the profitability of an investment and compare it to alternative investments.

To calculate ROI, the gain or loss from the investment is divided by the cost of the investment. The resulting percentage represents the return on investment. For example, if an investment of $1,000 generates a profit of $200, the ROI is 20%.

ROI is used by businesses to make investment decisions, evaluate the success of marketing campaigns, and determine the effectiveness of various business strategies. It is also used by investors to compare the profitability of different investments and make informed investment decisions.

While ROI is a useful metric, it does not take into account other factors such as risk, opportunity cost, and the time value of money. Therefore, it should be used in conjunction with other financial metrics and qualitative factors when making investment decisions.

how ROI can be used to evaluate the profitability of investments. It is important to note that ROI can vary depending on the investment and the timeframe of the investment.

The ROI formula is:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

In this formula, “Gain from Investment” refers to the amount of money earned as a result of the investment, and “Cost of Investment” refers to the total cost of the investment. The ROI is expressed as a percentage, which can be calculated by multiplying the result by 100.

For example, if a company invests $10,000 in a marketing campaign and generates $15,000 in revenue, the ROI would be calculated as follows:

ROI = ($15,000 – $10,000) / $10,000 = 0.5

To express this as a percentage, we would multiply the result by 100:

ROI = 0.5 x 100% = 50%

So in this case, the ROI for the marketing campaign would be 50%.

Examples of Return on Investment – ROI:

1. A company spends $100,000 on a marketing campaign and generates $150,000 in revenue. The ROI is calculated as ($150,000 – $100,000) / $100,000 = 50%.
2. An investor buys stock in a company for $10 per share and sells it for $20 per share. The ROI is calculated as ($20 – $10) / $10 = 100%.
3. A business invests $50,000 in a new product line and generates $75,000 in revenue. The ROI is calculated as ($75,000 – $50,000) / $50,000 = 50%.
4. An individual buys a rental property for $200,000 and generates $20,000 per year in rental income. The ROI is calculated as ($20,000 / $200,000) = 10%.
5. A company spends $50,000 on employee training and development programs, resulting in a 10% increase in productivity and a 20% decrease in employee turnover. The ROI is calculated as ((10% x revenue) + (20% x savings) – $50,000) / $50,000.
6. A business invests $1,000,000 in a new manufacturing plant, which generates $500,000 in annual revenue with a 10-year lifespan. The ROI is calculated as ($500,000 x 10 years – $1,000,000) / $1,000,000.
7. An entrepreneur invests $10,000 in a startup and sells their equity for $50,000 two years later. The ROI is calculated as ($50,000 – $10,000) / $10,000 = 400%.
8. A company invests $100,000 in a renewable energy project and saves $20,000 per year in energy costs. The ROI is calculated as ($20,000 x 5 years – $100,000) / $100,000.