# What is an Investment return (ROI)? Definition and example

Investment returns (ROI) is an evaluation metric that can be used to analyze an investment’s effectiveness and profitability or to compare the effectiveness of various investments. An investor’s return on investment (ROI) is calculated by comparing the investment’s return to the investment’s expense.

An investment’s profit (or return) is split by its cost (or ROI) to arrive at the ROI. The outcome is presented as a ratio or as a percentage.

## Calculation of return on investment

A simple formula to follow while calculating the return on investment:

ROI = Cost of Investment / (Current Value of Investment − Cost of Investment)

The term “Current Value of Investment” relates to the value of the investment at the time of sale. If you look at ROI from different sorts of investments side by side, you can see how they stack up against each other since ROI is expressed as a percentage.

Investment returns (ROI) are determined by splitting an investment’s profit (or loss) by the investment’s expense (or return). Return on Investment (ROI) is the percentage of profit divided by the amount invested. For example, if the investment returns \$100 and costs \$100, the ROI would be 1, or 100%.

Despite its simplicity, calculating return on investment (ROI) has several severe drawbacks. An ROI, for example, does not consider the time worth of money, making it impossible to make meaningful comparisons across ROIs.

Investors employ additional measures such as net present value (NPV) and inner rate of return (IRR) to compensate for this shortcoming (IRR).

## What is a good ROI?

To determine a “good” ROI, elements such as an appetite for risk and the time necessary for an investment to yield a return must be considered. Accordingly, risk-averse investors would likely embrace lower returns in exchange for assuming less risk. ‘All else equal’ Similarly, to entice investors to make longer-term investments, the return on investment (ROI) must be higher.

## An example of an investment return

Return on investment (ROI) may also determine how well you’ve invested in the stock market.

If you bought 1,000 shares of a company for \$10 each, then disposed of them for \$12 a piece a year later, you earned \$12 for every \$10 you invested, or \$1.20 for every \$1. The return on investment is 20% in this scenario since your original money was returned, as well as an additional 20%.

## Conclusion

ROI might consider the amount of time and effort put into the action and offer a metric of how well your resources were used.

Among the essential things to keep in mind when making stock choices is the return on investment (ROI). Knowing whether you’re making the proper investments based on ROI is important.