What is Return on Investment (ROI)? How to calculate it

Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment relative to the cost of the investment in percentage. It can be used to compare the efficiency of a number of different investments by directly measuring the amount of return on a particular investment, relative to the investment’s cost.

How to calculate ROI

The basic formula to calculate ROI is as below:

$ROI=\frac{\text{Current Value of Investment} - \text{Cost of Investment}}{\text{Cost of Investment}}$

Or, in a simple form for you to remember easily:

$ROI=\frac{\text{Benefit of Investment}}{\text{Cost of Investment}}$

Where,

• $\text{Benefit of Investment}=\text{Current Value of Investment} - \text{Cost of Investment}$

If the ROI of an investment is positive, it could be worth it. But if there are other opportunities with higher ROI, then these signals can help the investor to eliminate or select the best options. Likewise, investors should avoid negative ROI.

ROI vs. ROR

Both ROI (Return on Investment) and ROR (Rate of Return) serve the same purpose to tell you the percentage returns you have made with regards to your investment. The key difference between the two is the cost of transaction.

ROI tells you what you’ve earned off your investment while ROR simply tells you how fast you earned it.

ROR is the rate of return on your investment over a time scale while ROI is the similar number but usually not put on a time scale. It is usually put on a specific time period instead.

I found an interesting topic on the comparision between RoI and RoR on Quora that may interest you.