What does the ROI (Return on Investment) ratio measure?

The Return on Investment (ROI) ratio is a financial metric used to evaluate the efficiency or profitability of an investment relative to its cost. By focusing on the rate of return, it provides a clear picture of how much profit is generated for every dollar invested. This ratio is crucial for investors and businesses because it facilitates the comparison of the profitability of different investments, allowing for more informed decision-making.

ROI is calculated using the formula: (Net Profit / Cost of Investment) x 100. This reflects the relationship between the gain from the investment and the initial cost, enabling stakeholders to assess performance over time. Understanding this ratio is essential for any entity looking to maximize profitability and minimize costs when evaluating potential investment opportunities.