2 February, 2023

What is ROI – Return on Investment? | Video

Value is a crucial concept in Project Management. But there are different ways to calculate it. For my money, the most robust simple expression of value is Return on Investment, ROI.

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Return on Investment

Return on Investment is a widely used measure of the profit from an investment. It is used in many branches of business, public service, and the Not-for-Profit sector, in many countries. 

Unlike simpler measures of value, there is one simple calculation that finance professionals use.

ROI is the ratio of Net Income to Total Cost

ROI = Net Income / Total Cost

And Net Income is Total Income minus Total Cost. So, 

ROI = (Total Income – Total Cost) / Total Cost

ROI is typically expressed as a percentage, rather than as a numeric ratio. To express ROI as a percentage, we multiply the ratio by 100.

An ROI ratio of more than one, or a percentage of greater than 100% represents a positive return on investment – the higher, the better.

If the ROI ratio is less than one – or the percentage is less than 100%, the investment represents a loss.

Use of ROI in Commerce

In commerce, ROI has a wide range of uses. Examples include:

  • measuring the profitability of stocks and financial instruments
  • Evaluating business opportunities
  • Comparing alternative project options
  • Evaluating the success of a project 

DCF and Limitations of ROI

One limitation of using ROI is that it doesn’t account for when costs are incurred or income is received. Money spent or received today is worth more than the same numeric sum spent or received n the future. If the impact of these differences is significant, a better methodology is to use a Discounted Cash Flow (DCF) to calculate either a Net Present Value (NPV) or an Internal Rate of Return (IRR).

Take a look at our companion video, ‘What is a Discounted Cash Flow – DCF?

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Mike Clayton

About the Author...

Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.
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