How is ROI typically calculated?

Return on Investment (ROI) is a measure used to evaluate the efficiency or profitability of an investment, and the correct formula to calculate it is ROI = (Net Profit / Cost of Investment) x 100. This formula provides a clear understanding of how much profit was generated for every dollar invested, allowing businesses and investors to assess the overall performance of their investments.

In this formula, "Net Profit" represents the total revenue generated from the investment minus all costs associated with it. Meanwhile, the "Cost of Investment" refers to the initial amount invested. By taking the quotient of these two figures and then multiplying by 100, the result is expressed as a percentage, making it easier to compare the profitability of different investments.

For example, if you invested $1000 and made a net profit of $200 from that investment, the calculation would be (200 / 1000) x 100, resulting in an ROI of 20%. This percentage provides a quick reference to assess the effectiveness of the investment relative to its cost.

Understanding this formula is crucial for making informed decisions in both business and personal finance, as it directly relates to assessing financial performance and potential growth opportunities.