Return on Investment (ROI) is the universal performance measure used to evaluate the efficiency of an
investment or compare the efficiency of a number of different investments. It directly calculates the return
of a specific asset relative to its initial cost.
| Type |
Performance Metric |
| Formula |
(Net Return on Investment ÷ Cost of Investment) × 100% |
| Primary Use |
Comparing absolute performance across distinct asset classes |
1.0 The Formula
Basic Form
formulaROI = ((Final Value - Initial Cost) / Initial Cost) × 100
If you invest $10,000 into a stock, and two years later you sell it for $12,000, your pure ROI is
20%.
ROI completely ignores the time value of money. A 50% ROI generated over 2 weeks is spectacular. A
50% ROI generated over 20 years is terrible. Annualized Return (CAGR) must be used directly
alongside ROI to contextualize it.
3.0 Related Pages
While ROI measures an investor's profit on a stock purchase, ROIC measures the internal
corporate profit on capital spent.