ROI

Return on Investment (ROI) is a simple performance measure calculated by dividing the net profit of an investment by its initial cost, then multiplying by 100 to express the result as a percentage. If you invest 10,000 and receive 12,000 back, your ROI is 20%.

ROI is useful for quickly comparing the returns from different investments, but it has an important limitation: it does not account for time. A 20% ROI over one year is far more impressive than a 20% ROI over ten years. For time-adjusted comparisons, metrics such as Compound Annual Growth Rate (CAGR) are more informative.

In practice, calculating the true ROI of an investment requires accounting for all costs—transaction fees, taxes, inflation, and any income received during the holding period. A complete picture of investment returns is always more nuanced than a single headline number.