How to Calculate ROI — Return on Investment Formula
ROI (Return on Investment) is the most widely used metric to evaluate whether an investment is worth making. The ROI formula is straightforward: subtract your cost from your gain, divide by the cost, and multiply by 100 to get a percentage. A positive ROI means profit; negative means loss. Understanding ROI is closely tied to understanding how to calculate profit — both are essential business metrics.
The ROI Formula
ROI = ((Gain − Cost) ÷ Cost) × 100
Gain
Total return from the investment (revenue, sale price, etc.)
Cost
Total amount invested (purchase price, expenses, etc.)
ROI %
The percentage return relative to your investment
Real-World ROI Examples
Marketing Campaign
Invested: $2,000 → Returned: $6,500
225%
Excellent ROI — every $1 spent returned $3.25
Stock Purchase
Invested: $10,000 → Returned: $11,200
12%
Solid annual return for a stock investment
Equipment Purchase
Invested: $15,000 → Returned: $12,000
−20%
Negative ROI — the equipment didn't pay off
Real Estate Flip
Invested: $80,000 → Returned: $105,000
31.25%
Strong ROI for a property flip
Related: Understanding Profit
ROI and profit are closely related. While ROI measures the percentage return on an investment, profit measures the absolute dollar gain. Learn how to calculate both:
Frequently Asked Questions
What is a good ROI percentage?
A "good" ROI depends on the context. For stock market investments, 7–10% annually is considered solid. For business projects, 20%+ is typically expected. For real estate, 8–12% is common. Always compare against your cost of capital.
What is the difference between ROI and profit?
Profit is an absolute dollar amount (Revenue − Cost). ROI is a relative percentage showing how much you earned relative to what you invested. ROI = (Profit ÷ Investment) × 100.
Can ROI be negative?
Yes. A negative ROI means you lost money on the investment. For example, if you invested $1,000 and got back $800, your ROI is −20%.
How do I calculate annualized ROI?
Annualized ROI = ((1 + ROI)^(1/n) − 1) × 100, where n is the number of years. This lets you compare investments held for different time periods.
What is ROI used for in business?
ROI is used to evaluate marketing campaigns, equipment purchases, hiring decisions, and any capital allocation. It answers: "Is this worth the money we're spending?"
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