What does ROI measure in financial management?

ROI, or Return on Investment, is a crucial metric in financial management that assesses the profitability of an investment relative to its cost. It is calculated by taking the net profit generated from the investment and dividing it by the total cost of that investment. This ratio is typically expressed as a percentage, which allows for an easy comparison of the efficiency or profitability of various investments. An ROI greater than zero indicates that the investment has generated more profit than its costs, while a negative ROI suggests a loss.

The ability to compare different investments using ROI helps managers and investors make informed decisions about where to allocate resources. This measure captures the essential balance between the gains achieved and the costs incurred, providing a clear picture of whether an investment meets financial performance expectations. Thus, understanding ROI is vital for evaluating investment opportunities and overall financial health.