What is return on investment (ROI)?
Return on investment (ROI) is a performance metric used to evaluate the efficiency or profitability of an investment. It measures how much financial return you receive relative to the cost of the investment. ROI is expressed as a percentage, making it easy to compare the profitability of different investments regardless of their size.
How do you calculate ROI?
To calculate ROI, divide your net profit by the original investment amount and multiply by 100. Net profit is the final value of the investment minus its cost. For example, if you invested $2,000 and earned $500 in profit: ROI = (500 / 2,000) × 100 = 25%. The total value of the investment is $2,500. You can also track how savings grow over time using our interest calculator.
What is the ROI formula?
The standard ROI formula is: ROI (%) = (Net Profit / Investment Cost) × 100. Alternatively, it can be written as: ROI (%) = ((Final Value − Investment Cost) / Investment Cost) × 100. Net profit equals the gain from the investment minus its cost. A positive ROI means you gained more than you spent; a negative ROI means you lost money. For long-term projections, consider using a compound growth calculator to model how returns accumulate over time.
What are some ROI calculation examples?
Example 1 — stock investment: You buy shares for $5,000 and sell them for $6,500. Net profit = 6,500 − 5,000 = $1,500. ROI = (1,500 / 5,000) × 100 = 30%. Total value = $6,500.
Example 2 — business project: A marketing campaign costs $1,200 and generates $3,600 in revenue. Net profit = 3,600 − 1,200 = $2,400. ROI = (2,400 / 1,200) × 100 = 200%.
Example 3 — negative ROI: You invest $10,000 in equipment and it returns $8,000. Net profit = 8,000 − 10,000 = −$2,000. ROI = (−2,000 / 10,000) × 100 = −20%.
What is considered a good ROI percentage?
A "good" ROI depends on the type of investment and the time period involved. For stock market investments, the S&P 500 has averaged roughly 10% annual return historically. For real estate, returns of 5–10% per year are common. For business projects, many investors target an ROI above 15–20%. Any ROI higher than your cost of capital or the return you could get elsewhere is generally considered worthwhile. To plan for long-term financial goals, explore our savings goal calculator.
What are the limitations of ROI?
ROI is a simple and useful metric, but it has important limitations. It does not account for time — a 50% ROI over 10 years is very different from a 50% ROI over one month. It also ignores risk: two investments with the same ROI may carry very different levels of uncertainty. ROI does not factor in inflation, opportunity cost, or the ongoing costs of managing an investment. A related metric, Return on Equity (ROE), measures how efficiently a company uses shareholder equity to generate profit — useful for comparing businesses, while ROI is better for evaluating any specific investment. For a fuller picture, combine ROI with net present value (NPV), internal rate of return (IRR), and payback period.
How do you calculate annualized ROI?
Annualized ROI adjusts a total ROI figure to show the equivalent annual return, making it possible to compare investments held for different time periods. The formula is: Annualized ROI = [(1 + ROI)^(1/n) − 1] × 100, where n is the number of years. For example, you invest $5,000 and it grows to $8,000 over 5 years. Total ROI = (3,000 / 5,000) × 100 = 60%. Annualized ROI = [(1.60)^(1/5) − 1] × 100 ≈ 9.86% per year. The same 60% ROI achieved in 2 years would give ≈ 26.5% annualized — a much stronger result. Always consider the time horizon when comparing investments with identical ROI figures.