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ROI

What Is ROI?

Return on Investment, also known as ROI, is the primary indicator of how profitable an eCommerce business is. Typically, this indicator reveals how much a business can or has already gained profit-wise, as a result of specific marketing or promotional activities.

How To Calculate ROI

Business owners need to understand how to calculate it using the right formula before committing to any investment. The financial yardstick will help them compare the profit or loss probability of a particular investment, in relation to its cost. The calculation can be done in two main ways:

Method 1

ROI = (Net Returns/ Cost of investment) * 100%

Method 2

ROI = (Final Investment Value – Initial Capital Value)/Capital Cost of Investment * 100%

How To Interpret Return On Investment Result

The value can be useless unless you know how to interpret it. Although all the above formulas will give you a percentage value, the result is usually a ratio. Suppose you express it as a ratio, the numerator will represent the net returns, which can either be above or below zero.

That said, a value above zero signals good returns because the profits realized exceed the costs of the investment. On the other hand, a value below zero signals a loss, meaning the cost of the investment exceeds the profits realized. In this case, the net returns are treading the red mark.

Limitations of ROI

ROI is a pretty much less complicated eCommerce yardstick used by businesses across the world to measure the viability of their investments in terms of profits. However, this yardstick has some limitations too, including:

  • The analysis doesn’t consider investing holding period;
  • It doesn’t assess, nor does it adjust to capital risks;
  • The formula has room for costs exaggeration, which can mean inaccuracy;
  • The measurement largely hinges on financial gains;
  • Not ideal for comparing financing alternatives.

Industries With The Highest ROI

Industries with the highest values usually attract investors because they are highly profitable and returns can be realized after a relatively short while. Here are some industries with the highest ROI globally:

  • Retail Industry—22%;
  • Technology Sector—23%;
  • Capital Goods Industry—16%;
  • Consumers Non-Cyclical Sector—16%;
  • Healthcare Industry—11%.

Frequently Asked Questions About ROI

What is a good ROI?

Now that you understand what is ROI, what is a good ROI? The conventional wisdom of eCommerce practices notes that a good ROI should be around 7% or greater when calculated annually. This value factors in inflation risks. However, a figure above zero can still be good, as long as you can maintain operational costs.

What are ROI advantages?

Return on investment has various business benefits, including:

  • Ability to foretell the profitability of a venture;
  • An easy-to-calculate metric;
  • User-friendly in terms of interpretation.

What are ROI disadvantages?

ROI has its drawbacks too, including:

  • Not ideal for comparing different share buying options;
  • Doesn’t consider all risks;
  • Can be inaccurate.

What does ROI 50% mean?

A 50% value means that your capital is yielding a pretty sizable profit. For instance, your yield can be 50% if you invested is, say $20,000 and realized a profit of $30,000.

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