What is the formula for calculating Return on Investment (ROI)?

The formula for calculating Return on Investment (ROI) is indeed expressed as Net Profit divided by Investment Cost, multiplied by 100 to convert it to a percentage. This calculation provides a clear measure of the profitability of an investment relative to its cost, allowing investors and business managers to assess the effectiveness of their investments and make informed decisions.

ROI is a critical metric in finance and investment analysis because it helps individuals and organizations determine how much profit they have made or expect to make from their investments compared to the amount they invested. By expressing ROI as a percentage, it becomes easier to compare the returns on various investments, regardless of their scale or nature.

The calculation is straightforward: if an investment generates a net profit of $20,000 and the initial investment cost was $100,000, the ROI would be (20,000 ÷ 100,000) × 100 = 20%. This means that the investment yielded a 20% return on the initial amount invested.

Understanding this formula helps businesses and investors gauge their financial success and strategically allocate resources for maximum returns.