Financial return on investment

Financial return on investment (ROI) compares the gain or loss from an investment with its cost, usually as a ratio or percentage.

ROI formula: A calculation expressing investment gain or loss relative to investment cost. The basic ratio turns financial gain and cost into a comparable percentage.
Capital budgeting: The process of evaluating and selecting long-term investments in business assets or projects. ROI can inform decisions about which capital projects merit funding.
Profit margin: The share of revenue remaining as profit after specified costs. Profit margin measures profit per unit of revenue, not gain relative to investment cost.
Opportunity cost: The value of the best alternative forgone when a choice is made. An ROI comparison can overlook what the same capital might earn elsewhere.
Net present value: The present value of expected cash inflows minus the present value of expected cash outflows. Discounting future cash flows addresses timing that a simple ROI calculation ignores.
Marketing return on investment: An assessment of financial returns attributable to marketing spending. Marketing applies ROI to campaign costs and the revenue or profit they generate.
Total shareholder return: A stock investment's price change plus dividends, expressed as a percentage of its starting value. It captures shareholder outcomes over a period rather than returns against a project's cost.
Sunk cost: A cost already incurred that cannot be recovered. Including sunk costs in forward-looking decisions can distort an ROI-based choice.
Internal rate of return: The discount rate at which a project's net present value equals zero. It expresses a project's return as a rate while accounting for cash-flow timing.
Return on equity: A ratio measuring a company's net income relative to shareholders' equity. It is a related financial return measure focused on shareholders' invested capital.

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