Which accounting measure gives insight into a company's profitability on investments?

Return on Investment (ROI) is a key performance metric that gauges the profitability of an investment relative to its cost. It is calculated by taking the net profit from the investment and dividing it by the initial cost of the investment. This measure is particularly useful for businesses as it allows them to assess how effectively they are using their resources to generate profits.

By expressing the profitability as a percentage, ROI enables companies to compare the efficiency of multiple investments or projects. A higher ROI indicates a more profitable investment, making it a fundamental tool in managerial decision-making. This is especially important in strategic planning, as businesses often need to allocate limited resources across competing projects.

While gross margin and earnings per share also provide information about company performance, they don’t specifically measure profitability as directly related to investment decisions like ROI does. Gross margin focuses more on the relationship between revenue and cost of goods sold, while earnings per share reflects the net income allocated to each share of stock, which is influenced by various factors beyond just the effectiveness of investments. Operating expenses represent the costs associated with running the business but do not give a clear view of profitability stemming from specific investments. Hence, ROI stands out as the most relevant measure for assessing profitability in relation to investments.