Return on investment (ROI) is a financial metric of profitability that is widely used to measure the return or gain from an investment. ROI is a simple ratio of the gain from an investment relative to its cost. It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments.

In business analysis, ROI is one of the key metrics—along with other cash flow measures such as internal rate of return (IRR) and net present value (NPV)—used to evaluate and rank the attractiveness of a number of different investment alternatives. ROI is generally expressed as a percentage rather than as a ratio.

### How to Calculate ROI

### Interpreting ROI

- As noted earlier, ROI is intuitively easier to understand when expressed as a percentage instead of a ratio.
- The ROI calculation has “net return” rather than “net profit or gain” in the numerator. This is because returns from an investment can often be negative instead of positive.
- A positive ROI figure means that net returns are in the black, as total returns exceed total costs. A negative ROI figure means that net returns are in the red (in other words, this investment produces a loss), as total costs exceed total returns.
- To compute ROI with greater accuracy, total returns and total costs should be considered. For an apples-to-apples comparison between competing investments, annualized ROI should be considered.

### A Simple ROI Example

- To calculate net returns, total returns and total costs must be considered. Total returns for a stock arise from capital gains and dividends. Total costs would include the initial purchase price as well as commissions paid.
- In the above calculation, the first term [($12.50 – $10.00) x 1,000] shows the gross capital gain (i.e., before commissions) from this trade. The $500 amount refers to the dividends received by holding the stock, while $125 is the total commission paid.
- Dissecting the ROI into its component parts would result in the following: