Return on Investment (ROI) is a key financial metric used to measure the profitability and efficiency of an investment. It helps investors understand how much return they can expect relative to the cost of their investment. ROI is widely used in the stock market, business decisions, and personal finance to evaluate performance and compare opportunities.

ROI Formula: ROI = (Net Profit / Cost of Investment) _ 100

This simple formula shows the percentage of profit earned on the initial investment. For instance, if an investor invests _1,00,000 and earns _1,20,000 after a year, the ROI would be 20%. A higher ROI indicates better profitability, while a lower or negative ROI signals potential losses or underperformance.

Importance of ROI: ROI helps investors assess whether an investment aligns with their financial goals and risk tolerance. It is also useful in comparing different asset classes like equities, bonds, or mutual funds. However, ROI alone doesn’t account for factors such as time horizon, inflation, or risk — hence it should be used alongside other metrics like CAGR or Sharpe Ratio for a more complete analysis.

Limitations: While ROI provides a quick snapshot of profitability, it doesn’t reflect the time value of money. Two investments may show the same ROI, but one might achieve it faster, making it more efficient. Therefore, investors should interpret ROI in context, considering duration and market conditions.

In summary, Return on Investment is a fundamental measure to evaluate financial performance. Used wisely with complementary metrics, it helps investors make informed, data-driven decisions in their investment journey.