Return on Investment (ROI)

In finance, Return on Investment, usually abbreviated as ROI, is a common, widespread metric used to evaluate the forecasted profitability on different investments. Before any serious investment opportunities are even considered, ROI is a solid base from which to go forth. The metric can be applied to anything from stocks, real estate, employees, to even a sheep farm; anything that has a cost with the potential to derive gains from can have an ROI assigned to it. While much more intricate formulas exist to help calculate the rate of return on investments accurately, ROI is lauded and still widely used due to its simplicity and broad usage as a quick-and-dirty method. Many money-making schemes involve several businessmen seated at a table during lunch talking about potential investments until one of them exclaims about one with a very high ROI after doing the calculations on a napkin.

ROI may be confused with ROR, or rate of return. Sometimes, they can be used interchangeably, but there is a big difference: ROR can denote a period of time, often annually, while ROI doesn't.

The basic formula for ROI is:

As a most basic example, Chris wants to calculate the ROI on his sheep farming operation. From the beginning until the present, he invested a total of $50,000 into the project, and his total profits to date sum up to $70,000.

Chris' ROI on his sheep farming operation is 40%. Conversely, the formula can be used to compute either gain from or cost of investment, given a desired ROI. If Bob wanted an ROI of 40% and knew his initial cost of investment was $50,000, $70,000 is the gain he must make from the initial investment to realize his desired ROI.