What is ROI (Return on Investment)?
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed. It is expressed as a percentage and can be applied to almost any scenario: buying stock shares, launching a marketing campaign, or flipping real estate.
The Mathematics
The core formula is incredibly simple:
ROI = (Net Profit / Cost of Investment) × 100
Where Net Profit is calculated by subtracting your Initial Investment from your Returned Amount.
Understanding Annualized ROI
A standard ROI does not account for the variable of time. Earning a 50% ROI over one week is massively different from earning a 50% ROI over ten years. Therefore, adding a Time Period constraint calculates the effectively Annualized Return on Investment, yielding a percentage evaluating how much the investment returned on an evenly distributed baseline per year.