ROI stands for “Return on Investment,” and it’s a way of measuring the profitability of an investment. In simple terms, it compares the amount of money that was invested with the amount of money that was earned as a result of the investment. The formula for calculating ROI is:
ROI = (Net Profit / Total Investment) x 100
Where “Net Profit” is the total revenue earned from the investment minus any expenses incurred while earning that revenue, and “Total Investment” is the initial amount of money invested. The result is expressed as a percentage, so an ROI of 10% means that the investment generated a 10% return on the initial investment.
For example, let’s say you invest £10,000 in a stock and, at the end of the year, the stock has grown in value to £11,500. In this case, the net profit would be £1,500 (the difference between the initial investment and the final value of the stock), and the ROI would be 15% (1,500 / 10,000) x 100).
ROI is a useful metric because it allows investors to compare the profitability of different investments, regardless of the size of the initial investment. So, for example, an investment that generates a 5% ROI on a £1,000 investment is just as profitable as an investment that generates a 5% ROI on a £10,000 investment.
It’s worth noting that there are different types of ROI, depending on the investment. For example, there is Gross ROI which is calculated by taking into account only revenue earned, so not accounting for all the costs involved. Also, Time-Weighted ROI which is used to calculate returns when money is added or withdrawn from an investment over time.
ROI is a widely used metric in business and finance, and it’s commonly used to evaluate the performance of stocks, bonds, real estate, and other types of investments. It can also be used to evaluate the performance of a company or a business unit by comparing the net income generated by that company or unit to the amount of money invested in it.
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