What does the term return on investment (ROI) refer to?

Return on investment (ROI) is a financial metric that evaluates the profitability of an investment relative to its cost. It is typically expressed as a percentage and calculated by taking the net profit from the investment, deducting the initial cost, and dividing by the cost of the investment itself. This allows businesses and investors to assess how efficiently they are using their capital to generate profit.

Using ROI, stakeholders can compare the potential profitability of various investments or projects, helping them make informed decisions about where to allocate resources. A higher ROI indicates that an investment is yielding a good return compared to its cost, which is a crucial consideration for financial performance and strategic planning.

The other options do not accurately define ROI. While total revenues are important for understanding a company’s income, they do not measure efficiency or profitability relative to the costs involved in generating those revenues. Cash flow from operations focuses on liquidity rather than profitability metrics, and sales growth measures increases in sales volume or revenue without providing a direct assessment of profitability in relation to investment costs. Thus, the definition provided by the chosen option captures the essence of ROI as a tool for evaluating financial performance effectively.