Return on Investment (ROI) is the most fundamental measure of financial performance. This guide covers the formula, variants, and how to use ROI to make better decisions.
The Basic ROI Formula
ROI = ((Net Profit / Cost of Investment) × 100)
Or equivalently:
ROI = ((Final Value - Initial Cost) / Initial Cost) × 100
Worked Example
You invest $5,000 in stocks. A year later, your holding is worth $6,200.
ROI = ((6,200 - 5,000) / 5,000) × 100
ROI = (1,200 / 5,000) × 100
ROI = 24%
You earned a 24% return.
Annualised ROI
Simple ROI doesn't account for time. A 50% return over 10 years is very different from a 50% return in 1 year.
Annualised ROI = (1 + ROI)^(1/n) - 1
Where n = number of years.
Example: 50% return over 5 years:
Annualised ROI = (1.50)^(1/5) - 1 = 1.0845 - 1 = 8.45% per year
Marketing ROI
For marketing campaigns, include revenue generated:
Marketing ROI = ((Revenue - Marketing Cost) / Marketing Cost) × 100
Example: $2,000 ad campaign generates $8,500 in sales:
ROI = ((8,500 - 2,000) / 2,000) × 100 = 325%
What Is a Good ROI?
Context matters enormously:
| Investment Type | Typical ROI | |----------------|-------------| | Savings account | 2–5% | | Bonds | 3–7% | | Stock market (long-term average) | 7–10% | | Real estate | 8–12% | | Small business | 15–30% | | Venture capital (successful) | 25%+ |
ROI Limitations
ROI doesn't account for:
- Risk: Two investments with the same ROI can have very different risk profiles
- Liquidity: How easily can you access the money?
- Opportunity cost: What else could you have done with that money?
- Inflation: A 3% return with 4% inflation is a negative real return
Always consider risk-adjusted returns, not just raw ROI.
Net Present Value vs. ROI
For multi-year projects, NPV (Net Present Value) is more accurate than ROI because it accounts for the time value of money — $1,000 today is worth more than $1,000 in 5 years.
Use our ROI Calculator to calculate return on investment, annualised returns, and compare multiple investment options.