ROI (Return on Investment)
A simple holding-period return ratio whose usefulness depends on cost definition, cash-flow timing, leverage, taxes, fees, and measurement period.
Return on investment (ROI) commonly compares a gain or loss with a selected investment cost. Basic ROI is a holding-period ratio and does not automatically account for time, interim cash flows, reinvestment, financing, taxes, fees, inflation, or risk.
Frequently Asked Questions
What is a good ROI?
There is no universal percentage. A result must be interpreted with the holding period, risk, leverage, liquidity, benchmark, inflation, taxes, fees, and alternative uses of capital.
Does ROI account for time?
Basic ROI does not. Returns over different periods are not directly comparable without an annualization method and consistent treatment of cash flows.
Can ROI be misleading when there are interim cash flows?
Yes. Contributions, withdrawals, dividends, debt service, and distributions have different timing. IRR, time-weighted return, or explicit cash-flow analysis may be more appropriate.
Can leverage increase ROI?
Leverage can magnify gains and losses and changes the capital base used in the ratio. Borrowing costs, collateral, margin calls, and default risk must be considered.