Return on investment (ROI) is a financial ratio used to measure the efficiency of an investment. It is calculated by dividing the net profit of an investment by the total cost of the investment and then multiplying by 100 to express the result as a percentage. The higher the ROI, the more efficient the investment. For example, if an investment costs US$100 and the net profit is US$50, the ROI is 50 %.
ROI can be used to compare different investments and to evaluate the overall performance of a portfolio. It is important to note that ROI is a relative measure and does not take into account the time value of money. In other words, it does not take into account the duration of the investment or the rate of inflation. Moreover, ROI is only one of the factors that should be considered when making an investment decision. Other factors such as risk and diversification should also be considered.
ROI is also commonly used in business to measure the effectiveness of an advertising campaign, the productivity of an employee or the efficiency of a department. In these cases, ROI is used to determine the return on an investment in resources such as time, money or personnel.
Overall, ROI is a useful metric to evaluate the performance of an investment, but it should not be used in isolation. A comprehensive analysis of an investment should take into account a variety of factors such as ROI, risk, diversification and time value of money.