Measures how much an investment gained against what was put in, as gain ÷ investment × 100 (%). Converting to an annual figure compounds rather than simply dividing by the years, so investments held for different lengths of time can be compared.
This measures how much an investment gained against what was put in.
On its own it carries no sense of time, so it cannot tell 50% in a year from 50% over ten. Converting to an annual figure fixes that.
Gaining 50% over three years is not % a year. Growing at 16.7% a year would reach 1.59 times over three years, not 1.5. Compounding back takes the cube root of the multiple: , so the annual figure is 14.47%. The longer the period, the wider the gap from simply dividing.
An outlay of 1,000,000 returns 1,500,000 after three years. The gain is 500,000, the ROI 50% and the annual figure 14.47%. Reaching the same 1,500,000 in a single year would make the annual figure 50% as well.
Profit margin is profit against the selling price, and it describes how a product makes money. ROI is gain against the capital put up, and it describes what that capital produced. The denominators differ, so the two cannot be compared side by side.
The amount returned should include dividends or rent received along the way, not just a sale price. Leaving those out understates the return.