What does the term 'return on investment' (ROI) measure?

The term 'return on investment' (ROI) is a key financial metric that evaluates the efficiency and profitability of an investment. It measures the amount of return on an investment relative to its cost, providing insight into how effectively resources are used to generate profits. A higher ROI indicates that an investment has gained more compared to its cost, making it a critical tool for businesses to assess potential investments and make informed financial decisions.

ROI is calculated by taking the net profit from an investment, subtracting the initial cost of the investment, and then dividing that figure by the initial cost. This performance measure enables businesses to compare the profitability of various investments or projects, helping them allocate their resources more effectively. By focusing on investment efficiency, ROI serves as a guiding metric for strategic planning and evaluation of ongoing performance.

In contrast, the other options do not accurately describe ROI. Total revenue generated refers more to overall income without specifying efficiency. Operational costs pertain to expenditures rather than the effectiveness of investments, and the growth rate of market share reflects competitive positioning rather than financial return on specific investments.