What is Return on Investment?

Return on Investment (ROI) is a ratio used to compare the net income of a project or investment to the amount invested.

Return on Investment is a ratio that can be applied in many contexts, and this makes it a very popular way to compare the cost and benefits of many types of investments, for individuals or businesses. It is often interpreted as a percentage, to express the total gain over and above the amount invested as a percentage of the original amount.

For the internal or fundamental analysis of a business, ROI might be synonymous with Return on Assets (ROA), since the Assets are the location of all invested amounts in the company. For the everyday investor, the total amount paid into an investment, be it in stocks or bonds, real estate or precious metals (or any other asset), will be compared to the current market value of the assets.

The equation for ROI is basically current market value minus the price paid for the assets, divided by the price paid for the assets. Comparing any investment in a cost/benefit way to any other investment out there can help investors decide which assets they would like to invest in.

ROI isn’t the whole story, of course, since it does not take many factors into consideration, such as time, taxes, risks, and other important information.