Return on Investment
A Method of Comparing Investment Opportunities
Any investment has the potential for rewards and risk. Regardless if you are a small investor of a large bank’s portfolio manager, how one approaches the task of evaluating potential opportunities can make the biggest impact on the success of that individual or fund. Today we are going to examine one of the most commonly used ways to quickly assess Return on Investment (ROI) in order to examine its performance as well as compare to similar business models.
What is ‘Return On Investment?
Return on Investment is a performance measure that is used to evaluate how efficient an investment is, or for efficiency comparisons of numerous investments. ROI measures how much return you will receive on an investment relative to the cost of the investment.
To work out the return on investment as a percentage or ratio, you divide the return or benefit of an investment by the cost of the investment.
The formula is as follows:
ROI= (Gain from Investment- Cost of Investment) / Cost of investment
In this case, ‘Gain from investment’ means the proceeds that have been obtained from selling the investment in question.
Because ROI is expressed as a percentage, it allows for easy comparison against returns from other investments, which means you can measure a range of types of investments against each other.