Which statement defines Return on Investment?

Which statement defines Return on Investment?

• A. ROI measures the gain or loss generated relative to the investment cost.
• B. ROI equals profit divided by revenue.
• C. ROI measures market share.
• D. ROI equals net income divided by revenue.

Answer: (A)

Return on investment measures how much you gain or lose from an investment relative to what you put into it. It compares the net benefit from the investment to its cost, yielding a ratio or percentage that shows the efficiency of the investment’s use of capital. In practice, you take the net profit (the gain minus costs) and divide it by the investment cost. For example, if you invest $10,000 and generate a net profit of $2,000, ROI is 2,000 divided by 10,000, which equals 0.20 or 20%. This focuses on how effectively the investment converts capital into earnings, not on revenue alone or on market share. Other formulations mix up the denominator, such as profit divided by revenue, or net income divided by revenue, which describe different metrics like profit margin rather than ROI.

Return on investment measures how much you gain or lose from an investment relative to what you put into it. It compares the net benefit from the investment to its cost, yielding a ratio or percentage that shows the efficiency of the investment’s use of capital.

In practice, you take the net profit (the gain minus costs) and divide it by the investment cost. For example, if you invest $10,000 and generate a net profit of $2,000, ROI is 2,000 divided by 10,000, which equals 0.20 or 20%. This focuses on how effectively the investment converts capital into earnings, not on revenue alone or on market share.

Other formulations mix up the denominator, such as profit divided by revenue, or net income divided by revenue, which describe different metrics like profit margin rather than ROI.