Which formula best represents return on investment (ROI) in the examples provided?

Which formula best represents return on investment (ROI) in the examples provided?

• A. Cost divided by revenue
• B. Profit divided by cost
• C. Revenue divided by cost
• D. Revenue minus cost

Answer: (B)

Return on investment measures how much profit you earned for each dollar you spent. The best representation is profit divided by cost, because it expresses the net gain as a proportion of the investment. If you spend a certain cost and make a net profit equal to Revenue minus Cost, ROI = (Revenue − Cost) / Cost. Expressed as a percentage, that’s ROI × 100. For example, investing 100 dollars and earning 50 dollars in net profit yields an ROI of 0.5 or 50%. Other ways of framing the value don’t show the return relative to what was invested: revenue divided by cost compares inflows to outflows but isn’t the profit earned, and revenue minus cost gives the actual profit amount without showing how big the return is relative to the investment.

Return on investment measures how much profit you earned for each dollar you spent. The best representation is profit divided by cost, because it expresses the net gain as a proportion of the investment. If you spend a certain cost and make a net profit equal to Revenue minus Cost, ROI = (Revenue − Cost) / Cost. Expressed as a percentage, that’s ROI × 100. For example, investing 100 dollars and earning 50 dollars in net profit yields an ROI of 0.5 or 50%.

Other ways of framing the value don’t show the return relative to what was invested: revenue divided by cost compares inflows to outflows but isn’t the profit earned, and revenue minus cost gives the actual profit amount without showing how big the return is relative to the investment.