ROI (Return on Investment) measures the gain or loss generated on an investment relative to its cost. It is one of the most widely used financial metrics because it works for any type of decision — stocks, marketing campaigns, real estate, or business projects — and reduces the comparison to a single percentage.
The ROI formula
ROI (%) = ((Final Value − Initial Cost) / Initial Cost) × 100
This is equivalent to: ROI (%) = (Net Profit / Cost) × 100, since Net Profit = Final Value − Initial Cost.
Step-by-step: how to calculate ROI
- Identify your total cost — everything you spent or invested.
- Identify your total return — the final value or revenue received.
- Subtract cost from return to get net profit.
- Divide net profit by cost.
- Multiply by 100 to get a percentage.
Three worked examples
Stock investment: You buy shares for $5,000. They grow to $6,200. Net profit = $6,200 − $5,000 = $1,200. ROI = (1,200 / 5,000) × 100 = 24%.
Marketing campaign: You spend $2,000 on ads. The campaign generates $8,500 in revenue. Net profit = $8,500 − $2,000 = $6,500. ROI = (6,500 / 2,000) × 100 = 325%.
Real estate: You buy a property for $200,000, spend $20,000 on renovations, and sell for $260,000. Total cost = $220,000. Net profit = $40,000. ROI = (40,000 / 220,000) × 100 = 18.2%.
Annualized ROI — for multi-year investments
Simple ROI ignores time. A 50% ROI over 10 years is far less impressive than a 50% ROI over 1 year. Use annualized ROI to compare investments of different durations:
Annualized ROI = ((1 + ROI)^(1/n) − 1) × 100
where n = number of years.
Example: 24% simple ROI over 3 years → Annualized ROI = ((1.24)^(1/3) − 1) × 100 = 7.4% per year
How to interpret ROI results
- Positive ROI means you gained money relative to your cost.
- Negative ROI means you lost money.
- Higher ROI is not always better — a 200% ROI on a $100 investment is less valuable than a 20% ROI on a $1,000,000 investment in absolute terms.
- Time matters — always compare ROI over the same period, or use annualized ROI.
ROI by investment type
| Use case | What "cost" means | What "return" means |
|---|---|---|
| Stock investment | Purchase price | Sale price + dividends |
| Marketing campaign | Total ad spend | Revenue generated |
| Real estate | Purchase + renovation costs | Sale price |
| Business project | Total project cost | Net profit generated |
Common mistakes when calculating ROI
- Forgetting hidden costs — taxes, fees, maintenance, and time all reduce true ROI.
- Ignoring the time value of money — $100 today is worth more than $100 in five years.
- Comparing different time periods — a 6-month ROI is not comparable to an annual ROI without annualizing.
- Using gross revenue instead of net profit — always subtract all costs before calculating.
FAQ
What is a good ROI percentage? It depends entirely on the asset class. Stock market average is 7–10% annually. Marketing campaigns often target 300–500% ROI. Real estate varies by market. Always compare ROI within the same category.
Can ROI be negative? Yes. If your return is less than your cost, ROI is negative. Spending $1,000 and getting back $800 gives an ROI of −20%.
What is the difference between ROI and profit? Profit is an absolute number (dollars). ROI is a percentage relative to cost. ROI lets you compare investments of different sizes.
How do I calculate ROI over multiple years? Use the annualized ROI formula: ((1 + ROI)^(1/n) − 1) × 100 where n = number of years.