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A starting investment worth $5,000 that sold for $8,000 after 5 years has a total ROI of 60% and an annualized ROI of 9.86%.
What is ROI?
Return on investment, or ROI, is a a performance measure that looks at how much profit an investment generates. The more profit an investment can generate, the higher the ROI. The less profit, the lower the ROI.
ROI is expressed in percentage form. For example, an investment could have an ROI of 10% or 80%.
The ROI formula is:
The investment is the initial amount of money you invested in a project. The return is the profit or loss you made on that investment.
For example, if you invested $100 in the stock market and a year later it grew to $140, then your investment is $100 and your return is $40. Your ROI would be 40%.
How is ROI used?
ROI can be used to evaluate competing uses of money.
For example, for an individual, you might have multiple stocks you are interested in investing in. You should put your money in the one that will give you the highest ROI. This is the highest and best use of your money.
For a business, ROI might be used to evaluate a social marketing campaign. A company that spent $15,000 on a social media campaign would want to know how many customers and purchase orders resulted from that campaign. If the ROI of the campaign was high, then the business may want to run the campaign again.
What are ways a business can increase ROI?
There are many levers a business can pull to increase ROI. Increasing ROI can be done through increasing the return or decreasing the investment size. Both require a business to be more efficient in how it uses its money.
Tactics to increase ROI include:
- Increases prices
- Reducing overhead
- Controlling expenses