Profit/Return on Investment

[thoroughbred]

This has probably been discussed before, but please bear with me since I'm confused.

What is the differerce between Profit and Return on Investment, (ROI)?

How is each one defined?

Thanks

[ranchwest]

Profit is the amount that income exceeds expense. Wager $2, win $3, profit is $1.

ROI is literally return on investment (return divided by investment). Wager $2, win $3, ROI = 1.5 (3/2).

Profit expressed as a percentage, or profit margin, would be 3/2 minus 1, or 50% profit margin.

[thoroughbred]

Originally posted by ranchwest
Profit is the amount that income exceeds expense. Wager $2, win $3, profit is $1.

ROI is literally return on investment (return divided by investment). Wager $2, win $3, ROI = 1.5 (3/2).

Profit expressed as a percentage, or profit margin, would be 3/2 minus 1, or 50% profit margin.

Ranchwest:

Thanks.
Now just to be sure, can I say that if someone says that, overall, he is making 20% ROI, it means that he is getting back, on the average, $1.20 for every dollar invested?

[hurrikane]

That would be correct Thoroughbred.

Another definition of profit that I like.

Profit is the money you win that you spend somewhere besides 'at the track'.

[ranchwest]

Originally posted by thoroughbred
Ranchwest:

Thanks.
Now just to be sure, can I say that if someone says that, overall, he is making 20% ROI, it means that he is getting back, on the average, $1.20 for every dollar invested?

That is likely what the intended meaning is, but the usage is not technically correct.

[hurrikane]

ranch,

can you expand on that?

[GR1@HTR]

Sometimes ROI can be misleading...

Two different betters, each one of them bets $100 to win/wager.

Question:

Who makes more money?
Person A who gets 10 bets in a week with a 1.20 ROI
or
Person B who gets 50 bets in a week with a 1.07 ROI

This is why someones ROI is misleading...

[Larry Hamilton]

This one is a poser without a correct answer, but opinions will prove interesting, I think.

Let's say that this trainer has one horse in his stable. That horse has run 19 straight losing maiden races. That means that currently, his ROI is 0.00. In today's race, his horse wins and pays $100.00 to win. Since a simplistic equation for ROI is Amount won/amount spent, (its actually won/cost, but we will skip that for the moment) the trainer now has an ROI of 2.5.

Here's the test. What do you want your db model to spit out? 0 or 2.5 or something derived from the two?

I know some of you will say this is an oversimplification and that's true, but it suffices to make a point that happens so often that I wonder of the value of ROI.

[hurrikane]

this is an excellent point Larry. If you don't validate your findings you may be waiting a long loosing streak for this trainers horse to hit again.

Actually, he is likely to get rid of the pig. :D

[ranchwest]

Originally posted by hurrikane@HTR
ranch,

can you expand on that?

There is a lot of confusion among the terms profit, profit margin and ROI.

There is no such thing as a 20% ROI. It is a 20% profit margin. A 20% profit margin is equivalent to a 1.20 ROI.

The nice thing about ROI is that you don't have to get into negative numbers. The lowest possible ROI is zero.