Definition: Return on Investment (ROI) is a financial metric used to evaluate the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. ROI is widely used in business and finance to assess the efficiency and profitability of an investment or compare the efficiency of several different investments.
Calculation: ROI is calculated by taking the net profit from the investment, subtracting the initial investment cost, and dividing the result by the initial investment cost. The formula is: ROI = (Net Profit / Cost of Investment) x 100. The result is expressed as a percentage, where a higher percentage indicates a more profitable investment.
Application: ROI is utilized by businesses to make informed decisions regarding investments, marketing campaigns, and project funding. It helps in determining which investments are yielding the highest returns and assists in strategic planning by prioritizing activities that offer the greatest financial benefits.
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