Return on Investment (“ROI”) is a ratio or percentage value that reflects the profitability or efficiency of a certain trade or investment.
It is a simple-to-use tool that can generate an absolute ratio (such as 0.50) or a value in percentage (such as 50%).
As such, ROI can also be used when comparing different types of investments or multiple trading operations.
Specifically, ROI evaluates the return on an investment in relation to its purchasing cost.
This means that the calculation of ROI is simply the return (net profit) divided by the total acquisition costs (net cost).
The result may then be multiplied by 100 to get the percentage value.
Naturally, a high ROI value indicates that the investment was profitable, while a negative ROI means the return was lower than the costs.
How to Calculate ROI
The calculation of ROI is based on the following equation:
ROI = (Current Value - Total Cost) / Total Cost
Alternatively, it may also be written as:
ROI = Net Profit / Net Cost
For example, imagine that Joe Mama bought a can of Noneya for $100.
Out of nowhere, cans of Nonya jump in price to $150.
Joe Mama would have an ROI of 0.50 or 50%.