The calculation of return on investment (ROI) is a simple calculation for measuring the benefit from allocating capital. It is a measure of input-output behavior.
Parameters:
(1) input (investment, costs)
(2) output (earnings)
return on investment =
= ((earnings) - (investment)) / (investment)
where:
• Earnings minus costs indicates the profit.
Interpretation:
• A positive ROI indicates economic return. The higher the ROI the better the investment. This may be expressed as a percentage.
• An ROI of 0 indicates a break-even situation.
• A negative ROI indicates a loss.
Limitations:
• This is most useful as a rule-of-thumb.
• The simple calculation may be less informative if the return is over a long period of time or if multiple investments are needed.
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