What does the term "return on investment" (ROI) measure?

The term "return on investment" (ROI) specifically measures the profitability of an investment, making it an essential metric in evaluating the financial performance of an expenditure. ROI is calculated by taking the net profit generated from an investment and dividing it by the initial cost of the investment, typically expressed as a percentage. This allows businesses and investors to understand how effectively their resources are being utilized to generate profit.

In the context of business and finance, calculating ROI helps decision-makers compare the profitability of different investments or projects, aiding them in determining where to allocate funds for the best returns. By focusing on profitability, ROI provides a clear indication of the financial benefits associated with an investment, which is crucial when assessing the success or viability of a project.