Wednesday, August 14, 2013

Return on investment (ROI)

Return on investment (ROI) is, plain and simple, a principle of investing which determines how much benefit from investing a certain resource will an investor have. High ROI means that investor will have big benefit when compared to the investment he made. ROI is often used in order to evaluate efficiency of investment and compare it to a number of other possible investments. Economically speaking it is a way of showing the relationship of profit to capital invested.

Businesses often use ROI to determine, through a period of time, how much money they will make based on a certain investment and base their investments on that.
ROI and related metrics provide an idea of profitability, adjusted for the size of the investment assets used. ROI is often compared to expected (or required) rates of return on money invested.

 Marketing decisions are obviously based on ROI to some degree (quite a degree at that!) since these decisions influence how assets will be used and what are capital requirements. it is used to understand the company position and what is expected in return.

ROI is quite easily calculated. You use a formula that tells you that ROI equals (net profit/investment)*100.