What does ROI (Return on Investment) measure?

ROI, or Return on Investment, specifically measures the efficiency of an investment by comparing the gain or loss generated relative to the amount of money invested. This financial metric provides valuable insights into how effectively a company or individual is utilizing their capital to generate profits. The formula typically involves taking the net profit from the investment, subtracting the initial cost of the investment, and then dividing that number by the initial cost of the investment, often expressed as a percentage.

Understanding ROI is critical for making informed financial decisions, as it helps investors assess whether an investment is yielding adequate returns compared to alternative options. This direct assessment of investment performance allows stakeholders to evaluate and compare various investment opportunities effectively.

The other options focus on different aspects of finance but do not accurately reflect the primary purpose of ROI. For example, investment risk pertains to the potential for losses associated with an investment, while net revenue refers to total revenue minus costs, and gross profit focuses on earnings before other expenses are considered. Thus, ROI stands out as the measure for assessing investment performance rather than these other financial metrics.