Return on investment (ROI) is a measure that shows the gain from investment in relation to its cost. ROI can be used for comparing the success of different business investments and prioritise these accordingly.
ROI is expressed as a percentage and it is usually calculated in the following way: gain from investment minus the cost of investment divided by the cost of investment. To convert it into a percentage, the value is multiplied by a hundred. For example, an investor invests 1000 € into a company. A year later, the investor sells their shares in that company for 1500 €. ROI of the investment is (1500 – 1000) / 1000 = 0.5 or 50%.
While easy to calculate and interpret, ROI has its limitations. For example, it doesn’t consider the time that has passed from the initial investment and the inflation that has taken place. Also, in some instances, it is difficult to say which revenue is tied to a specific investment. Such as investing in SEO to increase traffic on your website. It is hard to say whether it was SEO or some other factors, such as posts on social media, that increased the traffic on that particular website.