 What Is Return on Investment (ROI) - Definition and Meaning
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# What Is Return on Investment (ROI)? – Definition and Meaning When you invest in an asset for your small business, you want it to eventually turn a profit. But, how do you measure the profitability of your investments? You can use return on investment (ROI) calculations to see how much income your assets generate.

## But wait, what is ROI?

Return on investment (ROI) is a profitability ratio that measures how well your investments perform. In other words, ROI lets you know if the money you shell out for your business is flowing back in as revenue. To find return on investment, divide your net revenue by the cost of your investment. For example, if you had a net revenue of \$30,000 and your investment cost you \$20,000, your ROI is 0.5 (or 50%).

ROI = (gain from investment – cost of investment) / cost of investment

You write ROI as a percentage. The greater the percentage, the better the investment.

## Example

The first step to finding your return on investment is to subtract the costs of your investment from the gains of your investment. The costs include any expenses you pay that go directly into the investment. For example, one cost could be a shipment of inventory. Your gains include any revenue you earned from the investment. You do not subtract interest or income tax payments for this calculation.

Item Amount
Revenue \$100,000
Cost of goods solds \$45,000
Operating expenses \$20,000

The chart above shows one company’s gains and costs in an investment. The company made \$100,000 in revenue. The company also spent \$45,000 on the cost of goods sold and \$20,000 in operating expenses.

First, find the total cost of the investment. To do this, add the cost of goods sold to the operating expenses. The total expenses are \$65,000 (\$45,000 + \$20,000).

Then, subtract the total expenses from the revenue. The difference is \$35,000 (\$100,000 – \$65,000).

Next, divide the difference between the investment’s gain and cost by the cost of the investment.

Item Amount
Investment gain minus cost \$35,000
Cost of investment \$65,000
Return on investment 53%

When you divide the investment’s gain minus the cost by the cost of the investment, you get 0.53 (\$35,000/\$65,000). To make this a percentage, multiply the number by 100. The ROI is 53%.

This ROI is a strong rate of return and indicates that the company is using its resources efficiently.