Return on Investment (ROI) is calculated by:

Return on Investment (ROI) is a financial metric used to evaluate the efficiency or profitability of an investment relative to its cost. The correct method for calculating ROI involves dividing net profit by the initial cost of the investment. This calculation provides a percentage that indicates how much profit is generated for each dollar invested.

When net profit is derived by subtracting total expenses from total revenue, and then this net profit is expressed as a fraction of the initial investment cost, it allows investors and stakeholders to assess the effectiveness of their investment decisions. A higher ROI signifies better performance.

The other methods listed do not reflect the standardized formula for ROI. Dividing total revenue by total costs, for instance, does not isolate profit, whereas calculating average revenue per transaction focuses on revenue generation rather than the relationship between profits and investment costs, which is central to evaluating ROI.