How to Calculate ROI
What is ROI?
Return on Investment (ROI) measures the efficiency of an investment as a percentage gain or loss relative to cost. It is used to compare profitability across different investments, regardless of size.
Step-by-Step Guide
- 1ROI = (Net Gain / Cost of Investment) × 100%
- 2Net Gain = Final Value − Initial Cost
- 3Annualized ROI = ((1 + ROI)^(1/years) − 1) × 100%
- 4ROI does not account for the time value of money unless annualized
Worked Examples
Input
Bought $10,000 stock, sold for $13,500 after 2 years
Result
ROI = 35%, Annualized = 16.2%
Input
Invested $5,000 in education, earned $15,000 more/yr
Result
ROI = 300% per year
Human capital ROI
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