What does ROI stand for in finance?

In finance, ROI stands for Return on Investment. It is a critical metric used to evaluate the efficiency or profitability of an investment. ROI is calculated by taking the net profit from an investment and dividing it by the initial cost of the investment, then multiplying by 100 to get a percentage. This percentage helps investors understand how effectively their capital is being utilized, allowing for comparisons between different investments or projects.

Return on Investment is important because it provides a straightforward measure of the gains or losses generated relative to the amount invested. High ROI indicates a potentially profitable investment, while a low or negative ROI suggests that an investment might not be worthwhile. Understanding ROI is essential for making informed decisions regarding where to allocate resources and how to assess the performance of various investments over time.