What does the return on investment (ROI) measure?

The return on investment (ROI) specifically measures the gain or loss that an investor experiences from an investment in relation to its cost. It is a key performance indicator that allows investors to assess the efficiency of their investments or compare the profitability of different investments. ROI is typically expressed as a percentage, indicating how much profit has been earned for every dollar invested.

For example, if an investor puts in $100 into an investment and receives $150 back, the ROI would be calculated based on the profit ($150 - $100 = $50) relative to the initial investment ($100), resulting in an ROI of 50%. This metric is essential for making informed investment decisions and evaluating potential opportunities, as it provides clarity on how effectively an investment can generate gains compared to its initial expense.

Understanding ROI is crucial for investors when assessing the feasibility of an investment and helps them determine whether to maintain, increase, or adjust their investment strategy.