What does ROI stand for in business finance?

Return on Investment (ROI) is a vital financial metric used to evaluate the efficiency of an investment or compare the efficiency of several different investments. It measures the amount of return on an investment relative to the investment's cost. This metric is particularly useful because it allows businesses and investors to assess not just the profitability of an investment, but also its effectiveness in generating returns relative to the initial outlay.

For example, if a business invests $1,000 into a project and earns $1,200 from it, the ROI would be calculated as follows: (Net Profit / Cost of Investment) x 100, which in this case is ($200 / $1,000) x 100 = 20%. A higher ROI indicates a more favorable investment.

The other options, such as Rate of Investment and Receipt of Investment, do not accurately capture the concept of evaluating the financial return generated from an investment in relation to its cost, which is central to the meaning of ROI. Return on Inventory is a less commonly used term and does not reflect the broader application of ROI in assessing success across various investment forms.