Return on Investment (ROI) measures how effectively a business uses its capital to generate profit; the higher the ROI, the better. It's defined as a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. In more general terms, it's the income that an investment provides in a year.
Most business people, however, use ROI simply to mean the return incremental gain from an action, divided by the cost of that action. In this sense, an investment that costs $100 and pays back $150 after a short period of time has a 50% ROI.
When ROI is requested, it's prudent to ask specifically how that ROI is to be calculated, meaning how both the "return" and the "investment" are derived and what time period is covered. There are three ways to maximize ROI, and a relatively small improvement in all three may have a major impact on overall ROI:
- Minimize invested costs
- Maximize the return
- Accelerate the returns
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