What Does ROI Mean?

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Knowing what your ROI is will help keep your investments profitable.
Knowing what your ROI is will help keep your investments profitable. (Image: investment image by Kit Wai Chan from Fotolia.com)

Return On Investment, or ROI, refers to the proceeds obtained from an investment during a specific time period and calculated as a percentage of the investment. It can also be calculated by taking the net profit after taxes and dividing it by total assets. Either calculation will give identical results.

Significance

ROI is a central part of decision making in terms of traditional investing as well as the purchase of assets (such as factory equipment or computers) and approval and funding for various projects (recruiting, training and marketing).

Considerations

The calculation for ROI can be modified to suit each situation, depending on what you include as costs and returns. There is no one right calculation of ROI because its definition, in the broadest sense, is just to attempt to measure how profitable an investment is. This makes ROI extremely flexible.

Warnings

ROI must not be used as the only basis to make a decision. ROI itself says nothing about the risk of an investment, or the likelihood that costs and returns will be as expected. It merely shows how returns will compare to costs if the results of the investment are what you hoped for.

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