What does ROI stand for in financial analysis, and what does it measure?

ROI stands for Return on Investment, and it is a key financial metric that measures the profitability of an investment relative to its cost. It is calculated by taking the net profit from the investment, subtracting the cost of the investment, and then dividing that figure by the cost of the investment. This ratio provides investors and managers with an understanding of how effectively their capital is being utilized to generate profit.

This metric is particularly important because it allows for comparison between different investment opportunities, taking into account both the profits earned and the costs incurred. A higher ROI indicates that an investment has earned significantly more relative to its cost, suggesting a good return. This is essential for businesses and investors to assess the performance of their investments and make informed decisions about where to allocate resources for the best potential return.

While other choices reference different financial concepts, they do not encapsulate the purpose and definition of ROI. Therefore, the focus on profitability in relation to investment cost makes the correct choice the most accurate representation of what ROI signifies in financial analysis.