How to Calculate Return on Investment (ROI)

What Is ROI?

Return on Investment (ROI) is a performance metric used to evaluate the efficiency or profitability of an investment. It measures how much profit or loss an investment generates relative to its cost. ROI is expressed as a percentage, making it easy to compare different investments regardless of their size.

The Basic ROI Formula

Step-by-Step Example

You invest $10,000 in a stock and sell it later for $13,500:

1. Calculate net profit: $13,500 - $10,000 = $3,500
2. Divide by cost: $3,500 ÷ $10,000 = 0.35
3. Convert to percentage: 0.35 × 100 = 35% ROI

Annualized ROI

Basic ROI does not account for the time an investment is held. To compare investments with different holding periods, use annualized ROI:

Example: Comparing Two Investments

Even though Investment B had a higher total ROI (80% vs 50%), Investment A was better on an annualized basis (22.5% vs 12.5% per year).

Real-World ROI Examples

Real Estate ROI

You buy a property for $200,000, spend $30,000 on renovations, and sell for $280,000:

1. Total investment: $200,000 + $30,000 = $230,000
2. Net profit: $280,000 - $230,000 = $50,000
3. ROI: ($50,000 ÷ $230,000) × 100 = 21.7%

Business Marketing ROI

You spend $5,000 on an ad campaign that generates $18,000 in revenue with $8,000 in product costs:

1. Net profit from campaign: $18,000 - $8,000 - $5,000 = $5,000
2. ROI: ($5,000 ÷ $5,000) × 100 = 100%

Stock Market ROI

You buy 100 shares at $45 each and sell at $62 each, paying $20 in commissions:

1. Cost: (100 × $45) + $20 = $4,520
2. Revenue: (100 × $62) - $20 = $6,180
3. ROI: (($6,180 - $4,520) ÷ $4,520) × 100 = 36.7%

Common ROI Pitfalls

• Ignoring time: A 50% return over 10 years is very different from 50% in 1 year. Always annualize when comparing.
• Forgetting hidden costs: Include taxes, fees, maintenance, and opportunity costs.
• Comparing apples to oranges: Different investments carry different risk levels — higher ROI often means higher risk.
• Using projected ROI as guaranteed: Past performance does not guarantee future returns.
• Ignoring inflation: A 5% ROI with 3% inflation is really only about 2% in real terms.

ROI Benchmarks by Investment Type