How is Return on Investment (ROI) calculated?

Return on Investment (ROI) is a financial metric commonly used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. The formula for calculating ROI is straightforward: it involves dividing the net income generated from the investment by the total amount invested. This calculation allows investors to determine the percentage of profit earned for every dollar invested.

In this context, using net income as the numerator means you are looking specifically at the profit that results from the investment. The total investment serves as the denominator to provide a clear picture of how the investment performed relative to the capital that was utilized.

This approach is widely accepted because it highlights the profitability of an investment in a way that is easily understandable. A higher ROI indicates a more favorable investment, which is essential for making informed financial decisions.

The other choices present alternative methods but do not accurately represent how ROI is typically calculated and interpreted in financial analysis. For example, dividing total revenue by expenses does not provide a clear insight into profitability relative to investment, while calculating total costs minus income does not offer a percentage return on the initial investment. Similarly, assessing asset growth over time might give an indication of investment value but does not directly link to the concept of ROI as a measure of efficiency or profitability.