Return on investment (ROI) indicates an investment’s profitability. ROI measures the efficacy of an investment by comparing the amount invested to the amount earned. A positive ROI value indicates that the investment or a trade has been profitable, while a negative ROI suggests that business is unfavorable to the investor.
Due to its simplicity and efficiency, this performance metric is widely used to evaluate stocks, cryptocurrencies, real estate and virtually any form of business. ROI particularly measures the profit on a specific investment relative to its cost. The value of ROI can be calculated by dividing the profit of an investment by its cost. It is either expressed as a percentage or ratio.
Interest in a new form of ROI called social return on investment (SROI) is common in business, especially for cryptocurrency projects. This method was developed in the late 1990s. SROI considers extrafinancial values of investments, such as social or environmental returns (profit), not conventional monetary yields.
However, ROI also carries its share of limitations, which include various enterprises using different components to calculate the return on investment and ignoring the time value of money, particularly more evident in long-term projects.