RETURN ON INVESTMENT (ROI)
Return on Investment (ROI) is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI measures the amount of return on an investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
The return on investment formula:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
In the above formula, "Gain from Investment” refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.
ROI is a popular metric because of its versatility and simplicity. Essentially, ROI can be used as a rudimentary gauge of an investment’s profitability. The calculation is not complicated, relatively easy to interpret, and has a range of applications. If an investment’s ROI is not positive, or if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options
For example, suppose Wole invested #500,000 in Landed properties in 2010 and sold the piece of land for a total of #1,200000 one year later. To calculate his return on his investment, he would divide his profits (#1,200000 - #500,000 = #700,000) by the investment cost (#500,000), for a ROI of #700,000/500,000, or 140%. With this information, he could compare his investment in landed properties with his other projects. Suppose Wole also invested #500,000 in Bankole Pastries in 2011 and sold his shares for a total of #700,000 in 2012. The ROI on Bankole's Pastries would be #200,000/#500,000, or 40%. This means the investment in landed properties yielded more return due to the high Return on Investment (ROI)
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