What is return on investment (ROI)?

Return on investment (ROI) is a crucial financial metric that assesses the efficiency and profitability of an investment relative to its cost. It provides a way to evaluate how much return is generated from an investment compared to its original cost. This relationship helps investors and businesses make informed decisions about where to allocate resources for optimal financial performance.

ROI is typically expressed as a percentage, calculated by taking the net profit from the investment, dividing it by the initial cost of the investment, and then multiplying by 100. A higher ROI indicates a more profitable investment, making it a foundational measure for financial analysis, strategic planning, and performance evaluation in various contexts.

Understanding ROI is important because it allows stakeholders to compare the profitability of different investments, assess business efficiency, and prioritize projects with the highest potential returns. This clear perspective on investment performance is essential for effective decision-making and aligning financial strategies with organizational goals.