CBAP v3 Strategy Analysis Practice Test

Return on Investment (ROI) is a key financial measure used to assess the profitability of an investment. It calculates the return generated from an investment relative to its cost, expressed as a percentage. This metric provides insight into how effectively an investment is performing; a higher ROI indicates a more profitable investment.

When evaluating different projects or investment opportunities, decision-makers often use ROI to compare expected profitability. It helps determine not just whether an investment is gaining value, but also how well it does so relative to its costs. This clarity in profitability is crucial for making informed choices about where to allocate resources.

In contrast, other options like break-even analysis focus on determining when an investment will start to generate a profit by identifying the point at which total revenues equal total costs, but it does not directly measure profitability. Cash flow analysis examines the inflows and outflows of cash within a business, which is important for understanding liquidity but not specifically for profitability. The financial leverage ratio assesses the degree to which a company is using borrowed funds, reflecting risk rather than profitability. Through these distinctions, ROI stands out as the essential measure of profitability in investment analysis.