What does ROI stand for and what does it measure?

ROI stands for Return on Investment, and it specifically measures the efficiency of an investment. It quantifies the profitability of an investment relative to its cost, allowing investors and business managers to assess how well their investments are performing. The formula for calculating ROI is typically the net profit from an investment divided by the initial cost of the investment, expressed as a percentage. This metric is crucial as it helps compare the profitability of various investments and make informed financial decisions.

In business contexts, a higher ROI indicates that an investment has gained more value compared to its cost, suggesting that the investment was a wise choice. Conversely, a low or negative ROI signals that an investment may not have been effective, prompting reassessments of investment strategies. Understanding ROI is fundamental for evaluating investment performance in both personal finance and corporate finance.