A return on investment (ROI) is an evaluation of how profitable an investment is compared to its initial cost. The ROI can help to determine the rate of success for a business or project, based on its ability to cover the invested amount.
It is important to point out that finding the return on an investment is not the same as calculating a company’s profit. Evaluating profit alone looks solely at a company’s cash flow. This is a demonstration of their immediate performance. Net profit would look at the income acquired after expenses are taken out. The return on the investment then takes that net income and measures it against the total cost of the financing.
An ROI can be helpful when comparing an investment against other opportunities or investments on the market. It is also a great way to analyse the success of an investment you’ve made. Typically, the riskier an investment, the more potential it has for a better ROI.