Return on Investment (ROI) Explained

In this article:

ROI stands for Return on Investment and is one of the simplest and most versatile ratios to compare the profitability of investments.

The formula to calculate ROI is the profit made on an investment divided by its cost.

ROI = (sale price – cost) / cost

ROI = profit / cost

For example, if Bendigo invests $500 in Penrith Ltd shares and sells them a year later for $600 (a profit of $100), the ROI from the investment is 20%. That is, $100 / $500.

For example, if Bendigo invests $500 in Penrith Ltd shares and sells them a year later for $600, the ROI from the investment is 20%. That is, $100 / $500.

The ROI of an investment can be compared to other potential investments to determine the best way to invest the money.

However, the ROI has a number of shortcomings, including:

  • It does not factor the time it takes to make the return
  • It does not consider intermediate costs (e.g. brokerage) or benefits (e.g. dividends)
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Owen Raszkiewicz

Owen Raszkiewicz

Owen is the Founder of Rask Australia, Lead Investment Analyst for Rask Invest and head educator at Rask Education. Prior to founding Rask, Owen was an investment analyst at the highly regarded managed funds research business Zenith Investment Partners and a Writer/Analyst for The Motley Fool Australia. Owen’s formal qualifications include a Master of Applied Finance and Master of Financial Planning from Kaplan Professional, Bachelor of Technology (Information Systems) from Swinburne University of Technology, Advanced Diploma of Financial Services (Financial Planning) and Diploma of Mortgage Broking Management. He's also completed level 1 of the Chartered Financial Analyst (CFA) program.

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