Definition
Return on investment (ROI) is a financial ratio used by companies and investors to compare the returns that a potential investment/project will earn versus its cost. ROI is measured as net income from investment divided by the cost of investment. The higher the ROI, the larger the benefit for an investor or company.
Example
ROI = Net Income / Cost of InvestmentSuppose a company plans to invest in a project that is valued at $500,000. 2 years later, it would have fetched $1,000,000.Thus, project ROI = (1,000,000 – 500,000) / (500,000) = 1 or 100%
Why it matters
Return on investment ratio offers various benefits:a. Simple to calculate:ROI is frequently used by investors and companies since it is easy to calculate using the benefit and the cost of investment. b. Universally acceptedReturn on investment is widely understood so it’s easy for companies to present it to investors and other stakeholders.