Picture 1 (fireproof)
Picture 2 (Big Shot 2020)
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Hi, I am confused about what exactly is the formula for ROI. Is it (Profit-Cost)/Cost (see picture 1) or Profit/Cost (see picture 2)? Both cases are from Darden and googling online both equations show up. Thank you a lot!
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Hi,
ROI is the return on investment, so the gains (profit) over the investment (cost). The ROI does not have a unit (so no dollar value). The ROI is positive if the number is higher than 1 (meaning you have more gains vs. costs).
Some books use the alternative definition of ROI (profit/cost -1). In that case, a ROI is positive if the outcome is >0. Let me know if you have other questions.
Mattijs
hey!
The correct formula for ROI in the context you're looking at is Profit / Cost (as shown in Picture 2). This is a common approach in financial analysis to assess how much profit is generated for each dollar of cost. The formula you mentioned from Picture 1, (Profit - Cost) / Cost, is another variation but is less commonly used in the industry.
Alessa
Hey there,
The technically correct answer is the second one there, where ROI is the Profit / Investment Cost
The name "Return on Investment" can be used as a guide to help you remember or know what you should be looking for.
The challenge is when the question wants a net cashflow impact instead of profit. That is when you get number 1 (which is not technically correct). And for this reason, clarifying your approach is critical and is what can help you not get into a sticky situation
All the best
It should be: Profit / Investment
In this case: (Annual Revenue - Annual Cost) / Initial or Upfront Cost
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