return on investment
| the amount of profit, before tax and after depreciation, from an investment made, usually expressed as a percentage of the original total cost invested. Abbreviation: ROI |
Based on the Random House Dictionary, © Random House, Inc. 2009.
Cite This Source
Return On Investment - ROI
A performance measurement used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment the result is expressed as a percentage or a ratio.
Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
Investopedia Commentary
Keep in mind that the calculation for return on investment can be modified to suit the situation -it all depends on what you include as returns and costs. The term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the revenue that each product has generated by its respective expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. Whenever using this metric, make sure you understand what inputs are being used.
Related Links
Ratio Analysis Tutorial
ROA On The Way
Understanding The Subtleties Of ROA Vs ROE
See also: Investment, Return, Return On Assets - ROA, Return On Equity - ROE, Return On Gross Invested Capital - ROGIC, Return On Investment Capital - ROIC
Also spelled: ROI
Cite This Source
Various Terms to Select From. Minimum $5000 Required to Invest.
www.Advanta.com/Notes
Copyright © 2009, Dictionary.com, LLC. All rights reserved.
