A return on investment (ROI) is a financial ratio showing gains or losses from an initial investment in relation to the investment cost. The metric calculates the attractiveness, profitability, or rate of return of an investment decision. ROI is a universal metric for determining the profitability of different investments, such as a house, a stock, or a car. In general, a high ROI percentage indicates a high return on investment. 

The ROI calculation is flexible and can apply to investments such as a home renovation or stocks, but there are a few disadvantages to the metric: 

1. __Non-financial gains__: ROI only measures finances, and a good ROI varies from investment to investment. The ROI calculation doesn’t consider other non-financial gains from an investment, such as the social impact or personal growth attached to the investment. 
2. __Miscalculations__: It’s easy to miscalculate ROI. For instance, an ROI of a house might not include the closing costs, repairs, and the other expenditures that come with homeownership. 
3. __Time value of money__: The ROI calculation does not factor in the time value of money—the idea that money is worth more now than it will be in the future. This can make it a less useful metric for evaluating long-term investments.
You can calculate the ROI by dividing the [net profit](https://www.masterclass.com/articles/net-profit-explained) (net present value minus cost) by the investment costs, then multipyling the number by 100 to get the ROI percentage. It is possible to have a negative ROI, as objects depreciate over time. 

__ROI = (Net Income / Cost of Investment) x 100__

The standard ROI formula does not consider the timeline of the investment, so a short-term investment has the same ROI as a long-term investment. However, if you want to take into account the value of an asset over time, then use an annualized ROI calculation to find the annual return:

__[(Net Income / Cost of Investment) ^ (1 / # of Years) – 1] x 100__
These three profitability metrics you can use to calculate return on investment, assets, and equity.

1. __Return on investment__: Return on investment (ROI) measures the gains or losses from an initial investment in relation to the investment cost and calculates the profitability of a potential investment.
2. __Return on assets__: Return on assets, ROA for short, measures how profitable a company is relative to its total assets. ROA is used to gauge whether or not a company is using its assets efficiently. A higher ROA means a company is earning more money on less investment.
3. __Return on equity__: ROE, return on equity, is used by shareholders to calculate how well a company generates profits for its shareholders. It also considers potential liabilities, so an ROE calculation is essentially a return on assets minus liabilities.
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The return on investment calculation can help you make business and real estate investment decisions.


The return on investment calculation can help you make business and real estate investment decisions.


Return On Investment Explained: How to Calculate ROI

A return on investment (ROI) is a financial ratio showing gains or losses from an initial investment in relation to the investment cost. The metric calculates the attractiveness, profitability, or rate of return of an investment decision. ROI is a universal metric for determining the profitability of different investments, such as a house, a stock, or a car. In general, a high ROI percentage indicates a high return on investment.

What Is Return on Investment? 

The ROI calculation is flexible and can apply to investments such as a home renovation or stocks, but there are a few disadvantages to the metric: <ol class="mc-m-4"><li class="mc-my-4"> 1. Non-financial gains: ROI only measures finances, and a good ROI varies from investment to investment. The ROI calculation doesn’t consider other non-financial gains from an investment, such as the social impact or personal growth attached to the investment. </li><li class="mc-my-4"> 2. Miscalculations: It’s easy to miscalculate ROI. For instance, an ROI of a house might not include the closing costs, repairs, and the other expenditures that come with homeownership. </li><li class="mc-my-4"> 3. Time value of money: The ROI calculation does not factor in the time value of money—the idea that money is worth more now than it will be in the future. This can make it a less useful metric for evaluating long-term investments. </li></ol>

3 Disadvantages of ROI

You can calculate the ROI by dividing the <a href='https://www.masterclass.com/articles/net-profit-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/net-profit-explained","linkCopy":"net profit","category":null}'>net profit</a> (net present value minus cost) by the investment costs, then multipyling the number by 100 to get the ROI percentage. It is possible to have a negative ROI, as objects depreciate over time. ROI = (Net Income / Cost of Investment) x 100

How to Calculate Return on Investment 

The standard ROI formula does not consider the timeline of the investment, so a short-term investment has the same ROI as a long-term investment. However, if you want to take into account the value of an asset over time, then use an annualized ROI calculation to find the annual return:[(Net Income / Cost of Investment) ^ (1 / # of Years) – 1] x 100

ROI vs. Annualized ROI: What’s the Difference?

These three profitability metrics you can use to calculate return on investment, assets, and equity.<ol class="mc-m-4"><li class="mc-my-4"> 1. Return on investment: Return on investment (ROI) measures the gains or losses from an initial investment in relation to the investment cost and calculates the profitability of a potential investment. </li><li class="mc-my-4"> 2. Return on assets: Return on assets, ROA for short, measures how profitable a company is relative to its total assets. ROA is used to gauge whether or not a company is using its assets efficiently. A higher ROA means a company is earning more money on less investment. </li><li class="mc-my-4"> 3. Return on equity: ROE, return on equity, is used by shareholders to calculate how well a company generates profits for its shareholders. It also considers potential liabilities, so an ROE calculation is essentially a return on assets minus liabilities. </li></ol>

3 Important Profitability Metrics

Get the <a href='https://www.masterclass.com/' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/","linkCopy":"MasterClass Annual Membership","category":null}'>MasterClass Annual Membership</a> for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more.

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The return on investment calculation can help you make business and real estate investment decisions.