Return on investment — the hope that every investor has
What is the return on investment (ROI)? The definition
The Return on Investment (ROI) is a key figure that indicates the success of an investment. For this purpose, the investment income is divided by the investment amount. It is also used as Return on investment or Return on capital describes and shows how much profit was made in relation to the capital invested. This percentage indicator provides insights into how efficient an investment is. In addition to financial goals, ROI can also be used to evaluate social projects (social return on investment, SROI).
Calculate ROI: Examples and Interpretation
- ROI for a company
In 2024, a company generated a profit of CHF 12 million with a total capital of CHF 170 million. The ROI is calculated by dividing the profit of 12 million by the total capital of 170 million and multiplied by 100, resulting in an ROI of around 7.06%. This shows that the company made a profit of around CHF 70,000 per million CHF invested in 2022. - ROI for a single investment
To calculate the profitability of a rented apartment that was purchased for CHF 300,000 and generated a profit of CHF 12,000 in the year, the profit (CHF 12,000) is divided by the capital investment (CHF 300,000) and multiplied by 100. The result is an ROI of 4%, which shows that the investment was worthwhile. - Social Return on Investment (SROI)
The SROI measures the social or environmental benefits of a project and is suitable for evaluating non-financial projects. The social profit is divided by the invested sum in order to calculate the social return. As can be seen from the example, quantifying social profit can be a major challenge.
Importance and interpretation of ROI
ROI provides companies and investors with an easy way to assess the profitability of an investment. A positive ROI means that the investment was successful, while a negative ROI indicates losses. However, in order to interpret the ROI adequately, several factors should be considered, including industry standards, individual business goals, risk appetite, and the economic environment.
Benefits and Disadvantages of ROI
benefits
- Quick and easy: The ROI is easy to calculate and understand and provides a clear statement of profitability.
- reproducibility: Since the ROI is expressed as a percentage indicator, different investments can be compared quickly and easily.
drawbacks
- Simplified calculation: The ROI reduces the calculation to two key figures and ignores important factors such as market conditions and risks.
- No time reference: Since different maturities of investments are not taken into account, a precise comparison is difficult.
Application tip
Since the ROI alone is often not enough to make a well-founded investment decision, it is recommended that in conjunction with other key figures How to use return on equity.
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