What is Return on Investment (ROI)? | CryptoWallet.com

What is Return on Investment (ROI)?

Return on Investment or ROI for short is a useful starting metric that is used to assess the potential profitability of an investment. Crypto investors use ROI as a means to learn more about the potential profits or losses that may be accumulated by a specific crypto asset. Often investors will use ROI information as an indicator for tweaking certain elements of their investment portfolio. 

ROI is calculated by subtracting the opening value of an asset from the current value, then dividing by the initial value.

The Use of the ROI Formula Calculation

If the ROI is positive, then that investment is profitable. If it’s negative, then it’s in a state of loss. This valuation metric is best seen as a starting point from which to build further considerations to make more informed investment decisions. 

One key limitation of the ROI is that it does not account for the passage of time and therefore is open to missing opportunity costs that can arise. Therefore ROR or Rate of Return calculations is best added to the formula. In addition, NPV or Net Present Value can add the extra dimension of currency inflation.

ROI can be ‘tweaked’ or inflated by reducing a companies expenses, which could potentially lead to greater costs down the line. This can take place due to production issues or performance issues incurred due to this expense cutting, thusly leading to a misrepresentative initial ROI.