ROI (Return on Investment)

A performance measure calculating the profitability of an investment by comparing net profit to cost, typically expressed as a percentage: (Gain - Cost) ÷ Cost × 100. For example, spending $1,000 on advertising generating $3,000 revenue with $500 costs yields $2,500 net gain: ($2,500 - $1,000) ÷ $1,000 = 150% ROI. ROI analysis guides resource allocation decisions by comparing investment efficiency across options. While conceptually simple, accurate ROI calculation requires properly attributing all costs (direct and indirect) and benefits, considering time value of money for long-term investments, and accounting for opportunity costs. Positive ROI investments should be scaled; negative ROI activities should be eliminated or improved.

Why it matters

ROI analysis prevents wasting resources on low-return activities while identifying opportunities deserving increased investment. Systematic ROI tracking enables optimising business operations for maximum profitability rather than operating on assumptions or hunches.