What is meant by "return on investment" (ROI)?

"Return on investment" (ROI) is a financial metric used to evaluate the efficiency or profitability of an investment. It measures the amount of return on an investment relative to the investment's cost. Essentially, ROI helps investors and businesses understand how much profit or loss they make from their investments and is calculated using the formula:

ROI = (Net Profit / Cost of Investment) x 100.

This metric is crucial for decision-making as it allows stakeholders to compare the profitability of various investments or projects, determining which ones yield the highest returns relative to their costs. By focusing on the profitability aspect, ROI provides a clear insight into the effectiveness of the capital deployed in a venture, making it an indispensable tool in finance and business strategy.