Return on Investment (ROI) is one of the most widely used profitability metrics in business and investing. It measures the efficiency of an investment by comparing the net profit to the total cost. A positive ROI means the investment earned more than it cost, while a negative ROI indicates a loss.

The basic formula is: ROI = (Net Profit / Total Cost) × 100, where Net Profit equals the Final Value minus the Initial Investment minus any additional costs. Annualized ROI adjusts this for the time period, using the formula: Annualized ROI = (Final Value / Total Cost)^(1/Years) - 1. This allows you to compare investments held for different lengths of time on an equal basis.

For example, an investment of $25,000 that returns $35,000 after $500 in fees yields a net profit of $9,500 and an ROI of 37.25%. If this took 3 years, the annualized ROI is approximately 11.02% per year. ROI is useful for comparing different investments, but it does not account for risk, liquidity, or the time value of money, so it should be used alongside other metrics.