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In finance, rate of return (ROR) or return on investment (ROI), or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually given as a percent rather than decimal value.

ROI is also known as rate of profit.

ROI does not indicate how long an investment is held. However, ROI is most often stated as an annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, “ROI” indicates an annual or annualized rate of return, unless otherwise noted.

ROI is used to compare returns on investments where the money gained or lost — or the money invested — are not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.

* $50/$1,000 = 5% ROI
* $20/$100 = 20% ROI

Measuring rate of return

The initial value of an investment does not always have a clearly defined monetary value, but for purposes of measuring ROI, the initial value must be clearly stated along with the rationale for this initial value. The final value of an investment also does not always have a clearly defined monetary value, but for purposes of measuring ROI, the final value must be clearly stated along with the rationale for this final value.

Cash flow (income stream)

ROI is a measure of cash (or potential cash) generated by an investment, or the cash lost due to the investment. It measures the cash flow or income stream from the investment to the investor. Cash flow to the investor can be in the form of profit, interest, dividends, or capital gain/loss. Capital gain/loss occurs when the market value or resale value of the investment increases or decreases. Cash flow here does not include the return of invested capital.

To the right is a simple example of cash flow on a $1,000 investment.