ROI stands for return on investment, which is a comparison of the profits generated to the money invested in a business or financial product. A negative ROI means the investment lost money, so you have less than you would have if you had simply done nothing with your assets.
Negative ROI Example
The basic formula for ROI requires taking the return generated by the investment subtracting the initial investment, and then dividing by the initial investment. Assume a business venture returns $100,000 and the initial investment was $125,000. The first part of the ROI calculation is $100,000 minus $125,000, which equals -$25,000. The investment resulted in a $25,000 loss. Divided -$25,000 by the $125,000 investment, and the result is -0.2, or a negative ROI of 20 percent.
Implications and Insights
Company leaders and investors typically project ROI before an investment by looking at projected returns and anticipated costs. If analysis reveals a high risk of a loss or negative ROI on a one-time project, the investment normally is avoided. Sometimes, however, investments are expected to have a negative ROI after one year or an initial period, but improve over time. This may occur when investing in a new business, which may require several years to turn a profit on its initial investment