What Is ROI?
The return on investment (ROI) is a ratio that measures the income earned on the invested capital. Return on investment is often used to evaluate performance.
The return on investment measures the earnings on investment and indicates how well the firm manages its assets. The above images shows the ROI for the largest publicly traded companies in the U.S. stock market.
Return on investment is useful for businesses as an evaluation tool. For example, an investment that is profitable and has a strong margin could be a focus on a firm. On the other hand, investments that have performed poorly might be dismissed in the future.
IS A Negative ROI Bad?
The above images shows some of the poorest ROI’s in the stock market. If you look at the performance of many these stocks they are among the worst in the market.
A poor ROI could mean that management is not as efficient as it should be. In addition, it’s important for a company to keep its debt under control. Borrowing funds can help a business grow, but if those funds are used irresponsibly it could cause the firm further financial damage.
How ROI Is Helpful
Imagine you and a friend buy shares of GNC Holdings (NYSE: GNC).
You buy 100 shares for $4 and sell for a profit at $5. The total gain on the transaction was $100, with an ROI of 25%
On the other hand, your friend bought 200 shares at $4.5 and sold for a profit at $5. Their total profit on the trade was $100. However, their ROI was 11.1%
By using a ratio like return on investment you’re able to compare two businesses in the same sector, despite them having different market caps.
Return on investment is a financial ratio that analysts and investors use to help determine how efficient an operation is with its investments. Some of the top performing stocks in the market have positive ROI’s, while some of the poorest performers have negative returns on investment. While conducting your fundamental analysis, make sure to take a look at the firm’s ROI.