Return on Investment (ROI)
A financial metric used to assess the efficiency and profitability of an investment, or to compare the efficiency and profitability of multiple investments, is known as return on investment (ROI). The ROI formula is: (Gain from Investment minus Cost of Investment), divided by (Cost of Investment). The resulting value is expressed as a percentage or ratio. A positive ROI indicates that the investment is profitable, while a negative ROI signifies that the investment is generating losses. The calculation can vary based on the specific gains and costs considered in the analysis.
Example
For example, Let’s say a company invests $10,000 in a marketing campaign to promote a new product. Over the following month, the campaign generated $30,000 in additional sales revenue directly attributed to the marketing efforts.
Using the ROI formula:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
We can calculate the ROI as follows:
ROI = ($30,000 – $10,000) / $10,000
ROI = $20,000 / $10,000
ROI = 2
Expressed as a ratio, the ROI is 2:1. This means that for every $1 invested in the marketing campaign, the company earns $2 in return. Therefore, the marketing campaign has generated a positive ROI of 200%.