1. What is Return On Investment (ROI)?

Return On Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It compares the magnitude and timing of gains from investment directly to the magnitude and timing of investment costs.

2. How Does the Calculator Work?

The calculator uses the ROI formula:

Where:

• \( \text{Net Profit} \) — Total profit generated from the investment ($)
• \( \text{Investment Cost} \) — Total cost of the investment ($)

Explanation: The formula calculates the percentage return on an investment relative to its cost. A higher ROI indicates a more profitable investment.

3. Importance of ROI Calculation

Details: ROI is a crucial metric for comparing the efficiency of different investments, making informed business decisions, and evaluating the performance of investment portfolios.

4. Using the Calculator

Tips: Enter net profit and investment cost in dollars. Both values must be positive numbers, with investment cost greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good ROI?
A: A good ROI varies by industry and investment type. Generally, ROI above 10-15% is considered good, but this depends on the specific market conditions and risk factors.

Q2: Can ROI be negative?
A: Yes, ROI can be negative if the net profit is negative (indicating a loss on the investment).

Q3: What are the limitations of ROI?
A: ROI doesn't account for the time value of money, investment duration, or risk factors. It should be used alongside other financial metrics for comprehensive analysis.

Q4: How is ROI different from ROE?
A: ROI measures return on total investment, while ROE (Return on Equity) measures return specifically on shareholders' equity.

Q5: Should ROI be annualized?
A: For comparing investments of different durations, it's often useful to annualize ROI to make valid comparisons.