Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures the return generated relative to the cost of the investment and is expressed as a percentage. The formula for ROI is:
ROI = (Net Profit / Cost of Investment) × 100
For example, if you invest $1,000 in a stock and sell it for $1,200, your net profit is $200. Your ROI would be (200 / 1000) × 100 = 20%. A positive ROI indicates a profitable investment, while a negative ROI indicates a loss.
ROI is one of the most widely used metrics in finance because it is simple and easy to understand. It helps investors compare the efficiency of different investments and make informed decisions about where to allocate their money. However, ROI does not account for the time period of the investment, so it should be used alongside other metrics for a complete analysis.