ROI (return on investment)
Measures the profitability of an investment relative to what it cost.
ROI stands for return on investment, and it is a financial key figure that measures the return, or profitability, of an investment. ROI gives an insight into how well an investment has performed relative to its cost, or to the amount invested.
ROI is a percentage showing the return on an investment relative to the cost of the investment. It is a way of assessing the profitability of an investment and helps investors judge whether an investment has been profitable or not.
How it is calculated
ROI is calculated by dividing the net profit from the investment by the investment cost, and then multiplying by 100 to give a percentage. The formula is as follows:
Annual ROI as a percentage = (Net return / Investment cost) × 100
What is it used for?
ROI can be used to evaluate how profitable an investment has been relative to its cost. It helps investors assess different investment opportunities and make informed decisions about where to place their funds.
Tips for improving ROI
- Increase income. Identify opportunities to increase the income from the investment, for example through increased sales, diversification of the product line or expansion of the market.
- Reduce costs. Make operations more efficient in order to reduce the costs connected with the investment. Identify areas where cost savings can be achieved without affecting quality or performance.
- Optimise resource allocation. Ensure that resources are used efficiently and in the areas that give the highest return. Identify and eliminate unnecessary costs or activities that do not contribute to the return.
- Risk management. Assess and reduce the risk connected with the investment through thorough analysis and management of potential risk factors.
- Timetable and follow-up. Put a plan in place to monitor and evaluate the progress of the investment over time. Adjust strategies or measures on the basis of the results in order to maximise the return.
It is worth noting that ROI alone does not give a complete picture of an investment's success or profitability. It should be assessed together with other relevant factors such as risk, long-term benefits and market conditions in order to make better informed investment decisions.
Read more about how the Capassa Score gives you a combined picture of your business's profitability.
More terms in returns and investment analysis
See all →ROE (return on equity)
Measures the return a business generates on the equity its shareholders have invested.
ROA (return on assets)
Shows how efficiently a business uses its total assets to generate profit.
ROCE (return on capital employed)
Measures the return on all capital in the company, both debt and equity.
WACC (weighted average cost of capital)
The weighted average cost of capital: the minimum return the company must deliver to its investors and lenders.
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