Return on Investment (ROI): Formula, Calculation and Limitations
ROI (Return on Investment) measures the profitability of an investment.
ROI Formula
ROI = (Gain - Cost) / Cost
Example
Investment: $10,000
Return: $15,000
ROI = ($15,000 - $10,000) / $10,000 = 50%
Limitations
- Doesn't account for time
- Doesn't account for risk
- Can be manipulated
Better Metrics
- IRR: Internal rate of return
- NPV: Net present value
