Return on Investment (ROI)

ROI answers a simple question: for every unit spent, how much was gained? It is calculated as the gain from the investment minus its cost, divided by the cost.

For example, if a company spends 10,000 on a marketing campaign that brings in 12,500 of extra profit, the net gain is 2,500 and the ROI is 25%. If an investor buys equipment for 40,000 and later sells it for 46,000 after using it profitably, the ROI depends on all the gains and costs counted.

ROI is popular because it is easy to understand and can be applied to almost anything: marketing, equipment, training, property or shares.

Its simplicity is also its weakness. Basic ROI ignores how long the investment takes. A 25% return over one year is far better than 25% over five years. It also says nothing about risk, and different people may include different costs and gains in the calculation. For larger decisions, companies usually supplement ROI with methods that account for time, such as net present value and internal rate of return.