What does ROI stand for and how is it calculated?

ROI stands for Return on Investment, which provides a measure of the profitability of an investment relative to its cost. It is an essential metric used to evaluate the efficiency of an investment or to compare the profitability of several investments.

The calculation of ROI is performed using the formula: ROI = (Net Profit / Cost of Investment) x 100. Here, net profit is the total income generated from the investment after all expenses, taxes, and costs have been deducted. The cost of investment is the total amount spent to make the investment. By dividing the net profit by the cost of the investment and then multiplying by 100, you obtain a percentage that reflects the return earned for each dollar invested.

This metric is particularly useful because it allows investors and business owners to easily compare the returns of different investments, as well as assess whether a particular investment meets their return expectations. The higher the ROI percentage, the more efficient the investment is considered to be.