What does Return on Investment (ROI) measure?

Return on Investment (ROI) measures the efficiency and profitability of an investment. It is typically expressed as a percentage and indicates how much net profit is generated from an investment relative to its cost. The correct approach to calculating ROI is by taking net profit after taxes and dividing it by the total investment made (which can reflect total assets in some contexts, particularly when evaluating overall asset efficiency).

The rationale behind this calculation is that it provides a clear picture of how effectively assets are being utilized to generate earnings. A higher ROI signifies that the investment has yielded a favorable return, demonstrating better performance in converting investments into profit.

While net profit after taxes divided by total assets is not the standard formula for ROI, it reflects a related concept of asset utilization and efficiency, which makes it relevant to ROI discussions. In contrast, the other options do not appropriately encapsulate the essence of ROI; they either focus on different financial measurements or ratios that do not relate directly to the profitability of specific investments.