Return on Investment (ROI) is a metric for measuring the profitability of a business idea or an investment. ROI measures the estimated returns or profit to be expected from an investment.
To calculate the ROI, the return on the investment is divided by the cost of the investment.
ROI = (current value of investment – initial cost of investment)/ initial cost of investment
Benefits of calculating return on investment
1. Helps in decision-making:
Calculating ROI helps in analyzing the potential profitability of a business venture or investment decision and aids in making informed decisions.
2. Measures performance:
Return on investment is a key metric that helps in measuring the efficiency and performance of a business or investment. It helps in comparing the returns generated by different investments and selecting the most profitable one.
3. Identifies underperforming investments:
By calculating ROI, it is possible to identify investments that are not generating desired returns and take corrective actions to improve their performance.
4. Helps in setting targets:
ROI can be used as a benchmark to set targets and goals for a business or investment. It can also be used to evaluate the progress and success of a business or investment over time.
5. Enhances accountability:
Calculating return on investment holds individuals and organizations accountable for their investments and ensures that they are making the best use of their resources. It also helps in tracking and monitoring the performance of investments to ensure that they are meeting the desired objectives.