Return on investment (ROI) is a way to gauge how well an investment is doing in terms of efficiency or profit. It helps you compare different investments by looking at how much return you get compared to what you put in. Some important things that affect ROI are how much you initially invest, any ongoing costs to keep it running, and the cash flow that comes from it.
How to Calculate Return on Investment
The return on investment (ROI) formula is as follows:
ROI= (Current Value of Investment−Cost of Investment)/Cost of InvestmentThe “Current Value of Investment” is basically what you get when you sell your investment. This figure takes into account things like the cash flow you’ve earned while holding the investment and any maintenance costs you’ve had to pay. Since ROI is shown as a percentage, it makes it super easy to compare it with returns from other investments, helping you see how different investments stack up against each other.
Conclusion
Return on investment (ROI) is a common way for investors to measure how profitable an investment is or to compare different investments. It’s shown as a percentage. However, ROI has its drawbacks since it doesn’t consider the time involved, potential opportunity costs, or how inflation impacts returns, all of which are crucial to think about.