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:

• \( Net Profit \) — Total profit gained from the investment ($)
• \( Investment \) — Total amount invested ($)

Explanation: The formula calculates the percentage return on an investment by dividing the net profit by the initial investment and multiplying by 100 to get a percentage.

3. Importance of ROI Calculation

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

4. Using the Calculator

Tips: Enter net profit and investment amounts in dollars. Both values must be positive numbers, and investment must be 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, but generally, a positive ROI indicates a profitable investment. Higher percentages are generally better.

Q2: Can ROI be negative?
A: Yes, ROI can be negative if the investment results in a net loss rather than a profit.

Q3: What are the limitations of ROI?
A: ROI doesn't account for the time value of money or the risk associated with an investment. It's best used alongside other financial metrics.

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, annualized ROI provides a more accurate comparison by accounting for the time period.