GeneralFinancial Glossary
ROI (Return on Investment)
Definition
The percentage return earned on an investment relative to its cost. Calculated as (Gain from Investment minus Cost of Investment) divided by Cost of Investment, multiplied by 100. ROI does not account for the time period, making it less useful than IRR or CAGR for comparing investments of different durations.
Why It Matters
A 50% ROI sounds impressive, but if it took 10 years to achieve, the annualized return is only about 4.1% (CAGR). Always ask 'over what period?' when someone quotes ROI. For proper comparison, convert ROI to CAGR or XIRR, which factor in time and allow apples-to-apples comparison across investments.