So, ROI is very easy to understand and brings a universal measure of profitability. Are there any limitations? Sure.
One of the biggest limitations of ROI is that it doesn’t take into account the time period. Why does this matter? Well, time is a crucial factor for investments. There could be other considerations (like liquidity and security), but if an investment brings 0.5 ROI in a year, that’s better than 0.5 ROI in five years. This is why you may see some talking about annualized ROI, which represents the investment returns (gains) you could expect over the course of a year.
Still, ROI won’t take into account other aspects of an investment. A higher ROI doesn’t necessarily mean a better investment. What if you can’t find anyone willing to buy your investment and get stuck with it for a long period of time? What if the underlying investment has poor liquidity?
Another factor to consider is risk. An investment might have a very high prospective ROI, but at what cost? If there’s a high chance that it goes to zero, or that your funds become inaccessible, then the prospective ROI isn’t all that important. Why? The risk of holding this asset for a long time is very high. Sure, the potential reward could also be high, but losing the entire original investment is certainly not what you want.