How is return on investment (ROI) calculated?

Return on investment (ROI) is a financial metric used to evaluate the efficiency or profitability of an investment, and it is calculated by taking the net profit generated from the investment and dividing it by the cost of the investment. This quotient is then multiplied by 100 to express ROI as a percentage.

Using this formula allows businesses and investors to determine how much they are earning relative to what they have invested, which is crucial for making informed financial decisions, such as whether to pursue additional investments or adjust their strategy. The emphasis on net profit ensures that the calculation reflects the actual earnings generated after accounting for costs, providing a clear picture of the investment's effectiveness.

In contrast, the other choices provided do not accurately represent the ROI calculation and focus on other financial relationships that do not yield the specific insight into investment efficiency that ROI provides. For instance, those alternatives mix elements of revenue, expenses, and assets but do not hone in specifically on the relationship between the net profit and the investment cost that is central to understanding ROI.