A financial metric that measures the profitability of an investment by comparing the net profit to the cost of the investment, expressed as a percentage.
ROI is one of the most widely used metrics for evaluating investment efficiency. It works for comparing different investments on equal footing — whether it's buying equipment, launching a marketing campaign, or investing in software. A positive ROI means the investment generated more than it cost. However, ROI doesn't account for the time value of money or risk, so it should be used alongside other metrics like NPV and IRR for major decisions.
A business invests ₹5,00,000 in new equipment that generates ₹7,50,000 in additional revenue over 2 years with ₹1,00,000 in additional costs. ROI = (₹1,50,000 ÷ ₹5,00,000) × 100 = 30%.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
It depends on the context. Stock market: 7–10% annually is average. Business investments: 15–25% is generally good. Marketing campaigns: 5:1 (500%) is excellent. Always compare against your cost of capital.
ROI doesn't account for time (earning 30% in 1 year is better than 30% in 5 years), risk level, opportunity cost, or non-financial benefits. Use alongside NPV, IRR, and payback period for better decisions.
The total profit of a business after deducting all expenses, taxes, and costs from total revenue. Also called the bottom line or net income.
The net amount of cash and cash equivalents moving into and out of a business during a specific period.
The point at which a business's total revenue equals total costs, resulting in neither profit nor loss.
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