What is the significance of calculating the rate of return on investments?

Calculating the rate of return on investments is significant primarily because it measures the profitability of an investment. This metric provides investors with insight into how much they have earned or lost relative to their initial investment over a certain period. By quantifying the return as a percentage, it allows investors to evaluate the effectiveness of their investments in generating income or capital appreciation.

This information is crucial for making informed investment decisions, as it helps in assessing whether an investment meets the investor's financial goals or expectations. A higher rate of return indicates a more lucrative investment, making it easier to compare various investment options based on their performance. Understanding profitability through the rate of return is thus a core component of sound investment strategy and financial planning.