Return on Investment (ROI) Calculator

Return on Investment (ROI) is a popular performance measure used to evaluate the efficiency of an investment or compare the efficiency of several investments. It indicates the ratio of profit made in relation to the capital invested.

Historical Background

The concept of ROI has been a fundamental aspect of financial analysis for centuries. It became more structured with the development of modern finance theory in the 20th century, providing investors and businesses with a key metric for evaluating the profitability of investments.

Calculation Formula

The formula for calculating ROI is:

\[ \text{ROI} = \left( \frac{\text{Final Value of Investment} - \text{Initial Value of Investment}}{\text{Initial Value of Investment}} \right) \times 100 \]

Example Calculation

Suppose you invested \$1,000 in a stock and sold the stock for \$1,200 after a year. The ROI for your investment would be calculated as:

\[ \text{ROI} = \left( \frac{\$1,200 - \$1,000}{\$1,000} \right) \times 100 = 20\% \]

This means you made a 20% return on your initial investment.

Importance and Usage Scenarios

ROI is widely used for:

1. Investment Analysis: To assess the profitability of various investment options.
2. Business Decisions: Companies use ROI to gauge the efficiency of capital expenditures.
3. Performance Measurement: Investors use it to compare the returns of different securities.

Common FAQs

1. What is a good ROI?

   • The answer varies by industry and individual risk tolerance. Generally, a higher ROI is better, but it must be considered in the context of risk and other factors.

2. Can ROI be negative?

   • Yes, a negative ROI indicates a loss on the investment.

3. Does ROI take time into account?

   • ROI itself does not consider the time period over which an investment is held. To account for time, variations like annualized ROI are used.