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ROI (Return on Investment)

ROI, or Return on Investment, shows how much profit or loss you made relative to the money you invested. It is a simple percentage that helps compare the efficiency of different investments or projects and supports better financial planning.

ROI = (Net Profit / Investment Cost) x 100.

Why ROI matters

  • Quick comparison: ROI helps compare different investment options on a common scale.
  • Decision support: It highlights which investments create the most value for the money spent.
  • Performance tracking: Useful for reviewing portfolios, business projects, and marketing spends.
  • Goal check: Helps assess if returns align with your financial targets.

How to calculate ROI

Calculate net profit by subtracting total cost from total value received, then divide by the cost and multiply by 100.

Simple example

If you invest Rs 1,00,000 and receive Rs 1,25,000, the net profit is Rs 25,000. ROI = (25,000 / 1,00,000) x 100 = 25%.

Include all costs

For accurate ROI, include fees, taxes, and transaction charges. Ignoring costs can inflate the return and distort valuation decisions.

ROI vs. CAGR

ROI is a simple total return, while CAGR shows annualized growth over multiple years. Use ROI for short-term comparisons and CAGR for long-term performance.

Simple and clear

ROI is easy to calculate and explain, making it widely used across finance and business.

Compare efficiently

It helps compare two investments, provided the time period and risk are similar.

Time impact matters

ROI ignores time, so pair it with CAGR for long-term evaluation.

Common ROI mistakes

  • Ignoring time period: A 20% ROI in one year is very different from 20% over five years.
  • Skipping costs: Fees, taxes, and charges can materially reduce actual ROI.
  • Not adjusting for risk: Higher ROI may come with higher volatility or uncertainty.
  • Comparing different durations: Use annualized metrics when timelines differ.

Who should use ROI

  • Investors comparing simple investment outcomes.
  • Business owners evaluating projects or marketing spends.
  • New investors learning how to measure profitability.
  • Anyone reviewing costs versus benefits of a decision.