Which measurement indicates the profitability of an investment?

Return on Investment (ROI) is a crucial metric for assessing the profitability of an investment. It quantifies the gain or loss generated relative to the amount of money invested, expressed as a percentage. The formula for ROI is typically calculated as (Net Profit / Cost of Investment) x 100. This allows investors to evaluate how effectively their capital has been utilized in generating income.

In contrast, net profit margin measures how much profit a company makes for every dollar of sales, providing insight into operational efficiency, but not directly indicating the profitability of a specific investment. Gross sales refer to the total revenue without accounting for returns or discounts, which does not provide a clear picture of profitability. The equity ratio assesses the proportion of equity financing relative to total assets, serving as an indicator of financial leverage rather than direct investment profitability. Hence, ROI stands out as the most effective measurement for determining the profitability of an investment.