What's what in finances: Return on investment What's what in finances: Return on investment

What's what in finances: Return on investment

A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments

Return on investment (ROI) lets a company know whether an activity is profitable enough to continue. It is the earning power of an asset or activity measured as a ratio of the net income of the activity to the operational cost. 

It's a popular metric because of its versatility and simplicity. Essentially, ROI can be used as a rudimentary gauge of an investment’s profitability. This could be the ROI on a stock investment, the ROI a company expects on expanding a factory, or the ROI generated in a real estate transaction. 

To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio. The calculation itself is not too complicated, and it is relatively easy to interpret for its wide range of applications.

There are several other new flavors of ROI that have been developed for particular purposes. Social media statistics ROI pinpoints the effectiveness of social media campaigns, for example, how many clicks or likes are generated for a unit of effort.

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