ROI Calculator
Calculate your Return on Investment (ROI) and analyze investment performance
What is ROI?
ROI (Return on Investment) is a key financial metric used to evaluate the profitability or efficiency of an investment. It measures the return generated relative to the cost of the investment and is expressed as a percentage. ROI is widely used in personal finance, business decisions, and investment analysis because it provides a straightforward way to assess and compare different opportunities.
Formula for ROI
ROI = (Net Profit / Cost of Investment) × 100
Where:
- Net Profit = Total returns or gains − Investment cost
- Cost of Investment = The total amount spent on the investment
Source: Investopedia - ROI Formula
Example of ROI Calculation
If you invest $1,000 in a project and earn $1,200 in return, the net profit is $200 ($1,200 − $1,000). Using the ROI formula:
ROI = ($200 / $1,000) × 100 = 20%
Source: The Balance - ROI Calculation
Why ROI is Important
- Simplicity: ROI is easy to calculate and understand, making it accessible for both beginners and professionals.
- Comparison: It allows investors to compare the profitability of various investments, regardless of type or size.
- Decision-making: ROI serves as a benchmark for determining whether an investment is worth pursuing.
Limitations of ROI
While ROI is an essential tool, it does have limitations:
- Timeframe Ignored: ROI does not account for how long it takes to achieve the return. For instance, two investments with the same ROI could have vastly different durations, which affects their value.
- External Factors: It doesn't factor in inflation, market volatility, or risk, which are critical for a more comprehensive investment evaluation.
Source: Forbes Advisor - ROI Explained
ROI remains one of the most popular and effective metrics for evaluating investment performance due to its simplicity and utility in financial analysis.