Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment.
Formula
(Current Value of Investment - Cost of Investment) / Cost of Investment
What does it tell you?
ROI measures the return of an investment relative to its cost. It helps investors determine how efficiently a company uses its capital to generate returns.
Interpretation
High ROI
A high ROI compared to industry averages indicates that the company is using its capital efficiently to generate profits. If a company's ROI is increasing over time, it is often a sign of improving management and operational efficiency.
Low or Negative ROI
A low ROI suggests inefficiency. A negative ROI means the investment is losing money.
How to Use It
Tip: Look for companies with a high, positive ROI compared to peers.
A growing ROI trend is a strong positive signal.
Limitations
Warning: ROI does not account for the holding period of the investment.
A 20% ROI over 5 years is very different from a 20% ROI over 1 year.
Always use ROI alongside other metrics like ROE (Return on Equity).