What is Return on Investment?
Return on Investment (ROI) is a financial metric that measures how much value an investment has gained or lost relative to its original cost. It is one of the most widely used measures of profitability and helps investors compare the efficiency of different investments.
How to Calculate ROI
Here is the formula:
[\text{ROI} = \frac{\text{Final Value} - \text{Initial Investment}}{\text{Initial Investment}} \times 100]
Where:
- Final Value is the current or ending worth of the investment.
- Initial Investment is the original cost to acquire the investment.
The result is expressed as a percentage.
Calculation Example
You invest $5,000 in a tech startup. Two years later, your investment is worth $7,500.
Calculate the net gain:
[\text{Net Gain} = 7{,}500 - 5{,}000 = 2{,}500]
Divide by the initial investment and multiply by 100:
[\text{ROI} = \frac{2{,}500}{5{,}000} \times 100 = 50]
The ROI is 50%. This means your investment grew by 50% over the period.