What does ROI stand for and what does it measure?

Return on Investment (ROI) is a key financial metric used to evaluate the profitability of an investment relative to its cost. It is calculated by taking the net profit from the investment and dividing it by the initial investment amount, often expressed as a percentage. This allows individuals and businesses to assess how effectively their capital is being utilized.

The focus of ROI is on the ability of an investment to generate surplus income compared to what was initially spent. By measuring profitability, ROI provides valuable insights for decision-makers when it comes to allocating resources, evaluating performance, and comparing different investment opportunities. This makes it a fundamental tool in finance and business strategy for assessing the effectiveness of investments over time.

Other options mention definitions that do not align with the established financial meaning of ROI, highlighting aspects that either misrepresent the concept or focus on different financial metrics that are not directly associated with measuring investment profitability.