How is return on investment (ROI) calculated?

Return on investment (ROI) is a key financial metric used to assess the efficiency or profitability of an investment relative to its cost. The calculation of ROI is fundamentally focused on measuring how much profit is made from an investment compared to the amount invested.

The correct method for calculating ROI involves taking the net profit—that is, the profit after all expenses have been deducted—and dividing it by the initial investment. This ratio gives a clear indication of the return made on the investment. Expressing this ratio as a percentage allows for easier comparison with other investments or metrics, as it standardizes the measure of return relative to the size of the investment.

In this context, ROI can be particularly useful when evaluating different investment opportunities, enabling investors to compare potential returns and make informed decisions based on relative profitability. This is why the third option accurately defines the process for calculating ROI.