What is Return on Investment (ROI)?

Return on investment is a profitability ratio that measures the gain or loss generated by an investment relative to its cost, usually expressed as a percentage of the amount invested.

ROI is the most widely used yardstick for comparing investment opportunities — projects, marketing campaigns, equipment purchases, acquisitions. Its strength is simplicity; its weakness is that it ignores the time value of money and the investment horizon.

For multi-year projects, annualised ROI, net present value (NPV) or internal rate of return (IRR) give a more accurate view. A high ROI over five years may be inferior to a lower ROI achieved in six months.

Formula

ROI = (Gain − Cost) ÷ Cost

Example

A marketing campaign costs CHF 50,000 and generates CHF 80,000 of attributed profit — ROI is (80,000 − 50,000) ÷ 50,000 = 60%.

Related terms

Return on Equity (ROE)

Return on equity is a profitability ratio that measures the net profit a company generates relative to its shareholders' equity, showing how efficiently management uses equity capital.

Profit Margin

Profit margin is a profitability ratio that expresses a company's profit as a percentage of its revenue, showing how many cents of profit are produced by each franc, euro or dollar of sales.

Free Cash Flow

Free cash flow (FCF) is the cash a business generates from operations after deducting the capital expenditures needed to maintain or expand its asset base — the cash truly available to shareholders, lenders and reinvestment.

Operating Profit

Operating profit (or operating income, EBIT) is what a business earns from its core operations after deducting both the direct cost of sales and all operating expenses, but before interest and tax.

Frequently asked questions

What is a good ROI?+

Depends on risk and alternatives; a stock-market average might be 7–10% real, so projects should usually clear that hurdle.

Is ROI the same as profit margin?+

No. Margin is profit ÷ revenue; ROI is profit ÷ amount invested.

What are the limits of ROI?+

It ignores time, risk and capital structure — use NPV or IRR for major decisions.