Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment. It measures the return on an investment relative to its cost. By calculating ROI, businesses and investors can assess the potential benefits and risks of investing in a project, purchase, or financial product. ROI is a universal measure, making it easy to compare the effectiveness of different investments.
- Calculation: ROI is calculated by dividing the net profit of an investment by its initial cost. The result is often expressed as a percentage.
- Applications: Businesses use ROI to gauge the effectiveness of various expenditures, such as marketing campaigns, equipment purchases, or new projects. Investors use it to compare the profitability of different investment opportunities.
- Decision-Making: A high ROI indicates that the gains from an investment compare favorably to its cost, aiding in strategic decision-making.
For example, a company might calculate the ROI of a digital marketing campaign by comparing the additional revenue generated directly from the campaign to its cost.