What is the formula for calculating the return on investment (ROI)?

The formula for calculating return on investment (ROI) involves assessing the profitability of an investment relative to its cost. This is expressed as net profit divided by the initial investment cost.

When you calculate ROI, you want to understand how much profit you have made in relation to what you initially invested. The net profit reflects the gain from the investment after subtracting all costs, while the initial cost is the total amount that was initially spent. By dividing the net profit by the initial cost, you obtain a ratio that indicates the efficiency and profitability of the investment. This ratio can be expressed as a percentage by multiplying by 100, which allows for easier comparisons between different investments.

Using this logic, the other choices do not accurately reflect the concept of ROI. For example, multiplying net profit by the initial cost does not provide a meaningful metric of return. Similarly, dividing the initial cost by net profit inversely misrepresents the return perspective, as it suggests how much investment is required for each unit of profit rather than the return earned on the investment. Adding net profit to the initial cost fails to demonstrate the profitability aspect altogether, as it merely combines the two figures without yielding a ratio that evaluates performance.