What is return on investment?


Quick Answer

Return on investment (ROI) is the most widely-used profitability ratio for determining the profitability and financial consequences of investments and financial decisions. As a cash flow statistic, return on investment compares the losses and gains associated with an investment against the costs of making the investment.

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Full Answer

Return on investment allows an investor or firm to analyze the performance of an investment. It is calculated by dividing the net return or benefit from a given investment by the cost of the investment. The return on investment is expressed as a ratio or percentage.

The return on investment calculation can be applied to a variety of investment types or situations. The versatility and simplicity of the metric make it a standard performance measure to evaluate the profitability or efficiency of an investment.

In addition to analyzing investment returns, the measure is often applied to resource allocation evaluations. It is a popular metric for evaluating acquisitions, programs and other capital initiatives. For instance, companies apply the return on investment calculation to evaluate their long-term return on investment versus their cost of capital. This analysis determines the efficacy of the company’s resource allocation practices. In this regard, return on investment is often applied to gauge the performance of pricing policies, inventory investments and human capital acquisitions or investments.

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