Valuation and investment
Return on investment (ROI)
The gain from an investment relative to its cost.
Last reviewedWhat does Return on investment (ROI) mean?
Return on investment compares the gain from an investment with its cost: ROI = (what you get back minus what you put in) ÷ what you put in. If you spend 100 and get 120 back, the gain is 20 and the ROI is 20%. It is simple, but it ignores when the money comes back, so a 20% ROI over one year is far better than 20% over ten. Use NPV or IRR when timing matters.
Where does it come up in case interview prep?
- Judging an investment: payback, ROI, and present valueLesson in Case math and quantitative reasoning
- Investment and capital project decisionsLesson
- Digital and AI transformationLesson
- Bank unit economics: is a loan worth making?Lesson in Retail and commercial banking
- Cybersecurity economics: breach risk, SaaS and servicesLesson in Cybersecurity
Related terms
- Payback periodHow long until an investment earns back its cost.
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- Time value of moneyMoney today is worth more than the same money later.
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.