How is the return on investment (ROI) calculated?

The return on investment (ROI) is calculated by dividing the net profit by the amount spent on the investment. This method provides a clear measure of the efficiency or profitability of an investment, allowing stakeholders to assess how well their capital has been utilized. By expressing ROI as a percentage, it becomes easier to compare the profitability of different investments, regardless of their scale.

When calculating ROI, the net profit is determined by subtracting the total costs associated with the investment from the total revenue generated by that investment. This approach highlights the relationship between the gain (net profit) and the cost incurred to achieve that gain, which is central to investment analysis in business contexts. This key metric helps businesses and investors make informed decisions about future investments or strategies.