What is ROI?

ROI (Return on Investment) represents the ratio of the profit gained from a specific investment to the investment cost. It indicates how much profit was earned relative to the amount invested and is a crucial metric for evaluating investment performance. ROI is utilized across various fields, including business, marketing, real estate, and stocks.

The formula for calculating ROI is as follows:

ROI = Net Profit / Investment Cost x 100

Here,

• Net Profit is the value obtained by subtracting total expenses from total revenue.
• Investment Cost is the total amount used for the investment.

For instance, if you invest 1 million won and earn a revenue of 1.5 million won, the ROI is calculated as follows:

ROI = (1.5 million won - 1 million won) / 1 million won x 100 = 50%

In this example, a 50% return on investment was achieved.

Importance of ROI

• Efficient Resource Allocation: ROI allows you to compare which investments or businesses yield higher returns. This assists in the efficient allocation of resources.
• Performance Measurement: You can evaluate the performance of specific projects or marketing campaigns. For example, by calculating the ROI of marketing activities, you can identify which activities are most effective.
• Decision-Making Support: When making investment decisions, you can refer to ROI to assess investment potential and concentrate on areas with high earning potential.

Points to Note When Calculating ROI

• Accurate Data Collection: Reliable data is essential for precise ROI calculation. Revenue and expenses must be accurately assessed.
• Consideration of Cost Factors: Investment costs should include not only direct costs but also indirect costs (e.g., labor costs, maintenance costs, etc.).
• Long-Term Perspective: Consider long-term ROI in addition to short-term ROI. While ROI may be low initially, it can increase over time.

Conclusion

ROI plays a significant role in evaluating investment performance and efficiently allocating resources. It enables better investment decisions and increases the likelihood of business success. When investing, it's crucial to consider ROI to make optimal choices.