Return on Investment
ROI measures how much value a deployed franc generates --- the productivity of capital. It answers: “Was this money well spent?”
What is it?
Return on investment (ROI) is the ratio of net gain to cost:
ROI = (Gain − Cost) / Cost × 100%
Invest CHF 10,000 and receive CHF 13,000 back: ROI = (13,000 − 10,000) / 10,000 = 30%. Simple, universal, and applicable to any deployment of resources --- financial investments, business projects, marketing campaigns, education, even time.1
ROI is the operational expression of opportunity-cost: every franc deployed has an ROI, and that ROI must be compared against the ROI of the next best alternative. A project returning 8% is good --- unless your alternative returns 12%.
The concept connects to time-value-of-money through annualised ROI. A 30% return over 3 years is approximately 9.1% per year. A 30% return over 3 months is approximately 120% annualised. Time matters. ROI without a time dimension is incomplete.
In plain terms
ROI asks one question: for every franc I put in, how many francs came out? If the answer is more than one, the investment created value. If less, it destroyed value. The gap between ROI options is where smart allocation lives.
How does it work?
ROI variants
| Metric | Formula | What it measures |
|---|---|---|
| Simple ROI | (Gain − Cost) / Cost | Basic return on capital deployed |
| ROE (Return on Equity) | Net profit / Equity | How productively the owners’ capital is used |
| ROA (Return on Assets) | Net profit / Total assets | How productively all assets are used |
| ROIC (Return on Invested Capital) | Operating profit / Invested capital | Core business productivity, excluding financing |
ROE and ROA appear on financial statements and are standard tools for comparing companies. ROIC is preferred by serious investors because it isolates the business’s operational performance from its financing decisions.
The highest-ROI investment
At the early stage of building independence, the highest-ROI investment available is almost certainly yourself --- your skills, your reputation, your ventures. CHF 5,000 spent on building a new training programme, growing an audience, or developing expertise can generate returns that no index fund can match. The risk is higher. But the risk is one you can manage because you are the variable.
This does not mean ignoring financial investments. It means sequencing: invest in yourself first (highest ROI, highest control), then deploy surplus into financial markets (lower ROI, lower effort, diversified risk).
Check your understanding
Five questions (click to expand)
- Calculate the ROI of a CHF 3,000 training course that led to a CHF 5,000 salary increase over one year. What about over five years?
- Distinguish ROI from ROE from ROIC. When would each be the most appropriate metric?
- Compare the ROI of investing CHF 10,000 in an index fund (7%/year) vs investing CHF 10,000 in developing a digital product that earns CHF 500/month. What are the risks of each?
- Connect ROI to opportunity-cost. How do you use ROI to decide between two competing uses of the same capital?
- Argue for or against: “At the early stage of independence, the highest-ROI investment is always yourself.”
Where this concept fits
Where this concept fits
graph TD TVM[Time Value of Money] --> ROI[Return on Investment] OC[Opportunity Cost] --> ROI MG[Margin] --> ROI ROI --> CS2[Capital Structure] ROI --> LV[Leverage] style ROI fill:#4a9ede,color:#fff
Sources
Footnotes
-
Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance. Chapters 5-6 on investment criteria and the net present value rule. ↩