Return on investment, also known as return on investment (ROI), is a metric used to assess the profitability of an investment. It basically measures how much profit or loss an investment generates compared to its initial cost.
Here’s a breakdown of key points about investment returns:
what’s this:
- A ratio that compares the profit or loss of an investment to its initial cost.
- expressed as a percentage.
How to calculate it:
- A common formula is ROI = (net profit / cost of investment) x 100.
- Net return is the difference between the final value of the investment and its initial cost.
What it tells you:
- A positive ROI indicates a gain, while a negative ROI indicates a loss.
- A higher ROI usually suggests a better performing investment.
Limitations:
- Does not consider the time factor, making it difficult to compare investments with different holding periods.
- Does not account for factors such as inflation or risk.
Utility:
- Helps in evaluating the performance of individual investments.
- Enables basic comparisons between different investments, but consider limitations before making investment decisions based on ROI alone.
