Return on Investment (ROI) is a metric used to understand the profitability of an investment. ROI compares how much you paid for an investment to how much you earned to evaluate its efficiency. A good ROI is subjective and depends on several factors, including the financial need of the investor, the investment climate, and the specific investment held.

For investments in stocks, many professionals consider a good ROI to be 10.5% or greater. According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation. However, it is important to note that the average return of the U.S. stock market is just that: an average of the market’s performance, typically going back to the 1920s. On a year-by-year basis, investors can expect returns that might be higher or lower.

ROI is also important to businesses because it shows whether or not the organization is making money on the various elements they’re spending capital on. If a company has a negative ROI, it could be seen as risky or not profitable. A positive ROI can signal growth and upward momentum. In marketing, calculating and analyzing ROI is a major KPI of how well a campaign performs. A high ROI means that the advertising channel brought in more sales than it cost to pay for the ad itself.

Ultimately, what is considered a good ROI depends on the individual investors goals and needs. It is important to keep in mind that ROI is only as good as the numbers you feed into your calculation, and ROI cannot eliminate risk or uncertainty. When using ROI to decide on future investments, it is still necessary to factor in the risk that projections of net profits can be too optimistic or even too pessimistic.