What does 'return on investment' (ROI) measure?

Return on investment (ROI) measures the profitability of an investment by comparing the gain or loss generated relative to the amount invested. This financial metric is expressed as a percentage and is calculated by dividing the net profit from the investment by the initial cost or investment amount. A higher ROI indicates a more profitable investment, while a lower ROI suggests less profitability.

This metric is widely used by investors to assess how effectively their funds have been utilized for generating profits. It allows for comparisons across different investments, enabling investors to make informed decisions about where to allocate their capital for the best returns. The focusing on profitability distinguishes it from other measurements, such as market value or predictions, which do not directly assess the financial performance of the investment itself.