What Is ROI?

Answer:
ROI stands for Return On Investment. This is

an investment term which is used as a performance metric in order to evaluate the efficiency of an investment, or to compare the efficiency of several different investments.

In order to calculate the ROI of an investment, take the return on the investment (benefit) and divide by the cost of the investment. The resulting answer is expressed as a percentage or ratio. The formula used to calculate ROI is as follows:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

Return on Investment (ROI) is popular because it is very versatile and simple to use. It will very quickly tell you if an investment will have a negative ROI. It is also a great tool to use when comparing various possible investments. That way, you can choose the investment or expenditure with the best ROI.

The above ROI formula above is a general tool. Keep in mind that it can be modified in order to meet your particular needs. For example, you may be considering a plant improvement in order to increase efficiency. In this case, you will also want to take into account labor savings after the improvement when calculating the gain. There is no one formula for ROI which fits every situation.

However, this flexibility does have a downside. Since ROI calculations can be modified, in order to meet the needs or point of view of the person doing the calculations. For example, a marketing person may base their ROI calculations on marketing expenses, whereas a financial analyst may base their ROI calculations on all the resources needed to manufacture and market the product. It is important to understand what inputs were used when making the calculations. Never look simply at the number without seeing what went into that number.