In one sentenceThe net gain from a specific investment divided by its cost, showing whether the decision recovered its cost and by how much it exceeded it.
Simply put
It is used to evaluate a specific decision: opening a branch, buying a machine, a marketing campaign. You deduct the cost from the total the investment earned, then divide the result by the cost.
Its weakness is that it ignores time: a 30% return in one year is far better than 30% over five years. That is why it is complemented by net present value and the internal rate of return.
Worked example
A bakery bought a new oven for 200,000 SAR, and it generated additional profits totaling 260,000 SAR over three years.
Total profits from the oven260,000 SAR
Cost of the oven200,000 SAR
Net return = 260,000 − 200,00060,000 SAR
Return = 60,000 ÷ 200,00030%
Formula: (Total earned by the investment − its cost) ÷ its cost
Don't confuse it with
Internal rate of returnThe internal rate of return is an annual rate that takes into account the timing of each cash flow, while return on investment is a total rate for the whole period.