Return on Investment (ROI)
A measure of the profit earned on an investment relative to its cost.
What is ROI?
Return on investment (ROI) is a simple performance metric that measures the profitability of an investment relative to its initial cost. The formula is: ROI = (Net Profit ÷ Cost of Investment) × 100%. ROI is one of the most widely used metrics in business and investing because it is intuitive and comparable across different types of investments. However, it has limitations: it does not account for the time required to generate the return (time value of money) or the risk taken. For time-sensitive comparisons, annualized ROI or more sophisticated measures like IRR and CAGR are preferred. Despite its simplicity, ROI remains the standard first-pass metric for evaluating any business decision.
Example
An investor buys 100 shares of a stock at $50 each ($5,000 total). Two years later, the shares are worth $65 each ($6,500) and the investor received $200 in dividends. Total return: ($6,500 + $200 − $5,000) ÷ $5,000 × 100% = 34% total ROI, or approximately 15.8% per year annualized. This can be compared to the S&P 500 return over the same period to evaluate relative performance.