Why is Return on Investment (ROI) often considered the most commonly used financial performance measure?

• A. Because it measures only the liquidity of a company.
• B. Because it focuses solely on cash flows rather than accounting profits.
• C. Because it only considers total assets and ignores net income.
• D. Because it provides a standardized way to compare profitability across different companies and investments.

Answer: (D)

Verified step by step guidance

1. Understand the concept of Return on Investment (ROI): ROI is a financial metric used to evaluate the profitability of an investment relative to its cost. It is expressed as a percentage and calculated using the formula: ROI = (Net Profit / Investment Cost) × 100.
2. Recognize the importance of ROI: ROI is widely used because it provides a standardized way to measure and compare the profitability of different investments or companies, regardless of their size or industry.
3. Clarify why ROI is not limited to liquidity or cash flows: ROI considers net income, which includes both cash and non-cash items, making it a comprehensive measure of profitability rather than focusing solely on liquidity or cash flows.
4. Explain why ROI is not restricted to total assets: ROI evaluates profitability in relation to the investment cost, which can include various components such as equity, debt, or specific project costs, rather than solely focusing on total assets.
5. Highlight the versatility of ROI: ROI is a versatile metric that can be applied across different industries, investment types, and scales, making it a valuable tool for comparing financial performance in a standardized manner.