Debt Dictionary

ROI

Investment Dictionary -> ROI

The return on investment (ROI) measures the efficiency of an investment or makes an efficiency comparison among a number of different investments. The return of the investment is divided by its cost in order to calculate ROI.

The ROI metric is very popular because of its simplicity and versatility. For example, if an investment lacks a positive ROI, other opportunities should be pursued and the investment in question forsaken.

A note should be taken, however, that the calculation of ROI and its definition can be altered to suit particular needs. What one includes as costs and returns is all that counts here. The term’s definition tries to measure the investment’s profitability and therefore, there is no calculation that is “right”.

A marketer may use two different products as a comparison, dividing in the process the revenue, generated by each product, by its marketing expenses. In other cases, a financial analyst may employ a different ROI calculation for the same two products. He may divide the net income by the total value of resources, used in making and selling the product.

It is flexible but has a negative side because such calculations are easily modified to serve someone’s purposes. The result, therefore, can be expressed in many ways that differ. The understanding of inputs is vital when using this metric.

Return on Investment and Rate of Return list the cash flow from an investment over a set period of time, normally a year. The investment profitability is measured through ROI, not through the investment’s size. The size of an investment is increased through dividend reinvestment and compound interest which yields a higher dollar return in the process Return on Investment is based on the invested capital and represents a percentage return.

Generally the higher investment risk increases the possibility of higher investment return or higher investment loss.


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