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Return on Investment (ROI)
Definition
ROI is a financial metric that measures the profitability of an investment relative to its cost, expressed as a percentage.
Explanation
ROI is one of the most widely used financial metrics. The basic formula is: (Net Profit ÷ Cost of Investment) × 100. ROI can evaluate any investment — stocks, real estate, business projects. Its main limitation is not accounting for time — a 50% ROI over one year is much better than the same return over five years.
Example
You invest $50,000 in a business and sell your stake for $75,000. Net profit = $25,000. ROI = ($25,000 ÷ $50,000) × 100 = 50%.