Return on investment
Return on investment measures the gain from an investment relative to its cost.
The simplest question to ask of any investment is whether it gave back more than it took. Return on investment is the simplest way to answer.
Return on investment is a measure of the gain from an investment relative to its cost, expressing the profit as a proportion of the amount invested. It is among the most widely used and intuitive measures of financial performance, valued for its simplicity and its applicability to almost any decision.
A universal yardstick
The appeal of return on investment is its generality and ease. By dividing the gain from an investment by its cost, it produces a single percentage that can be applied to a project, a campaign, a piece of equipment, or a whole company, and compared across very different uses of money. This universality makes it a common language for evaluating and comparing investments, and a quick way to ask the basic question of whether something paid off, and how well, relative to what it cost.
The hidden weakness: time
For all its convenience, return on investment has a serious blind spot: it usually ignores time. A return of fifty per cent is impressive in one year and mediocre over ten, yet the basic measure treats them alike, because it does not account for how long the money was tied up. By omitting the time value of money, simple return on investment can flatter slow investments and mislead comparisons between options with different time horizons, which is why more rigorous appraisal uses net present value and discounting instead.
Flexible to the point of slippery
Return on investment is also only as meaningful as the figures fed into it, and those can be defined in many ways. What counts as the gain and what counts as the cost are open to interpretation, and the measure can be made to look good or bad by adjusting what is included. This flexibility makes return on investment easy to manipulate and hard to compare across sources that define it differently, so a quoted figure must always be examined for what it actually measures.
Return on investment is the everyday workhorse of financial evaluation, prized for turning any decision into a simple, comparable percentage of gain over cost. Its simplicity is both its strength and its weakness: indispensable for quick judgement, but blind to timing and vulnerable to loose definition, which is why it is best used as a first, rough guide rather than the final word, with time-sensitive methods reserved for decisions that truly matter.