What is ROI
Return on Investment (ROI) is a financial metric that measures the return obtained from an investment relative to its cost. It is one of the most widely used indicators in finance, marketing, and business intelligence because it is simple to calculate and to compare across different investments.
The ROI formula
ROI (%) = [(Net gain − Investment cost) ÷ Investment cost] × 100
Example: if you invest €5,000 in an advertising campaign and obtain €8,000 in additional revenue, the ROI is [(8,000 − 5,000) ÷ 5,000] × 100 = 60%. This means that for every euro invested you earned €0.60 net.
How to interpret ROI
- Positive ROI: the investment generated more than it cost
- ROI = 0%: you recovered exactly the invested capital
- Negative ROI: you lost money relative to the initial investment
- Comparative ROI: a 30% ROI is good or bad depending on the alternative — if the market returns 10%, 30% is excellent
Limitations of ROI
ROI does not consider the time factor: a 50% ROI over 10 years is much less interesting than a 50% ROI over 1 year. For this reason, in advanced financial analysis, annualised ROI or the Internal Rate of Return (IRR) is used, which accounts for the time value of money.
Furthermore, ROI does not measure the associated risk: two investments with the same ROI but very different risks are not equivalent. Metrics like the Sharpe Ratio integrate risk into return evaluation.
ROI in marketing
In digital marketing ROI is often expressed as ROAS (Return on Ad Spend): ROAS = Campaign revenue ÷ Ad spend. A ROAS of 4 means every euro spent on advertising generated 4 euros in revenue (not necessarily 4 euros in net profit).