Return on Investment (ROI)

Return on Investment, often referred to as ROI, is a financial metric widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. The purpose of ROI is to measure the efficiency of an investment or to compare the efficiencies of several different investments.

In simple terms, ROI is used to understand the profitability of an investment. It quantifies the return on an investment as a percentage, and is computed by dividing the net profit from the investment by the cost of the investment. A high ROI means that the investment gains compare favorably to its cost, signaling a productive investment.

ROI is a popular measure for business investment because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options. For example, if you invested $1,000 in a venture, and it returned $1,100, the ROI would be 10 percent, making it a profitable opportunity.