What does 'return on investment (ROI)' evaluate?

Return on investment (ROI) is a key financial metric that evaluates the efficiency of an investment. It is calculated by dividing the net profit generated from an investment by the initial cost of that investment, often expressed as a percentage. This measurement allows investors and businesses to assess how effectively their capital is being utilized to generate profits.

ROI is particularly useful because it provides a straightforward way to compare the profitability of different investments, regardless of their scale or the industry they represent. A higher ROI indicates that the investment has generated more profit relative to its cost, making it a desirable attribute in any investment strategy.

Using this metric, businesses can make informed decisions about where to allocate resources, distinguishing between profitable and less effective investments. For instance, if one investment shows a significantly higher ROI than another, it suggests that the former is a better option for putting money into.

The other choices, while related to business performance and decision-making, do not correctly define ROI. Total revenue relates to the gross income from sales before expenses, market share pertains to the percentage of an industry that a company controls, and operational costs refer to the expenses directly tied to running a business. None of these directly assess the efficiency or profitability of an investment like ROI does.