How to Calculate ROI — Return on Investment Explained

Return on Investment (ROI) is one of the most widely used performance metrics in business and finance. It expresses the gain or loss from an investment as a percentage of the original cost. A positive ROI means the investment returned more than it cost. A negative ROI means it lost money. The simplicity of ROI makes it useful for comparing very different types of investments on a common scale.

roi return-on-investment investing profit business performance

Quick reference

Basic ROI

(Gain - Cost) / Cost x 100

Percentage return on original investment

Break even ROI

Returned exactly what was invested

Annualised ROI

(1 + ROI)^(1/years) - 1

Converts total ROI to annual rate

ROI vs CAGR

Same formula

Annualised ROI = CAGR for simple investments

What ROI measures

ROI measures the efficiency of an investment by comparing what you gained to what you spent. A 50% ROI means you gained 50 cents for every euro invested. A -20% ROI means you lost 20 cents for every euro invested.

ROI can be applied to any type of investment: financial assets, property, business projects, marketing campaigns, employee training, or equipment purchases. Because it produces a single percentage, it allows comparison between very different investment types. A 15% ROI on a marketing campaign can be directly compared to a 15% ROI on a stock purchase, even though they are completely different in nature.

However, ROI as typically calculated ignores the time dimension. A 100% ROI over 1 year is very different from a 100% ROI over 10 years. Without adjusting for time, ROI comparisons between investments of different durations are misleading.

The ROI formula

Formula

ROI = \frac{\text{Net Gain}}{\text{Cost}} \times 100

ROI equals the net gain (final value minus cost) divided by the original cost, multiplied by 100 to express as a percentage. Net gain can be positive (profit) or negative (loss).

Net GainFinal value of the investment minus the original cost. Includes any income received such as dividends or rent plus any capital gain or loss.

CostThe total original investment including purchase price, transaction costs, and any other acquisition costs.

Annualised ROI — adjusting for time

Basic ROI does not account for how long the investment was held. To compare investments held for different periods, convert to annualised ROI using the compound annual growth rate (CAGR) formula:

Annualised ROI = (1 + ROI)^(1/years) - 1

Example: an investment that produces 60% total ROI over 4 years has an annualised ROI of (1 + 0,60)^(1/4) - 1 = (1,60)^0,25 - 1 = 1,1247 - 1 = 0,1247 = 12,47% per year.

Compare this to an investment producing 40% total ROI over 2 years: annualised ROI = (1,40)^(1/2) - 1 = 1,1832 - 1 = 18,32% per year. The second investment has a lower total ROI but a higher annual rate. Without annualising, the first investment would appear better. With annualising, the second is clearly superior on a per-year basis.

For investments under 1 year, the simple ROI can be annualised by multiplying by (365 / holding period in days), though this linear extrapolation is less accurate than the compound method.

Worked examples across asset classes

Example 1Stock investment with dividends

Given: Purchase price: 5.000 | Sale price after 3 years: 6.800 | Dividends received: 450

Result: Total ROI: 45% | Annualised ROI: 13,2%

Net gain = (6.800 - 5.000) + 450 = 1.800 + 450 = 2.250. ROI = 2.250 / 5.000 x 100 = 45%. Annualised: (1,45)^(1/3) - 1 = 1,1318 - 1 = 13,18% per year. Note that dividends must be included in the net gain. Excluding them understates the true return, which is a common error in equity ROI calculations.

Example 2Business marketing campaign

Given: Campaign cost: 10.000 | Revenue directly attributable: 35.000 | Cost of goods sold for that revenue: 20.000

Result: Marketing ROI: 50%

For a marketing campaign, net gain is the gross profit from the campaign, not the revenue. Gross profit = 35.000 - 20.000 = 15.000. Marketing ROI = (15.000 - 10.000) / 10.000 x 100 = 5.000 / 10.000 x 100 = 50%. Using revenue instead of gross profit would give ROI = (35.000 - 10.000) / 10.000 = 250%, which overstates the return by ignoring the cost of delivering the goods.

Example 3Property investment

Given: Purchase price: 200.000 | Transaction costs: 8.000 | Rental income over 5 years: 60.000 | Sale price after 5 years: 240.000

Result: Total ROI: 44,2% | Annualised ROI: 7,6%

Total cost = 200.000 + 8.000 = 208.000. Net gain = (240.000 - 208.000) + 60.000 = 32.000 + 60.000 = 92.000. ROI = 92.000 / 208.000 x 100 = 44,2%. Annualised: (1,442)^(1/5) - 1 = 7,6% per year. Transaction costs must be included in the total cost. Excluding the 8.000 in transaction costs would inflate the ROI to 46,0%, overstating the return.

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ROI limitations and what it misses

ROI is a useful but incomplete metric. Several important factors are not captured by a basic ROI calculation.

Risk is not included. A 15% ROI on a government bond and a 15% ROI on a speculative startup investment are equally good by ROI, but they carry completely different levels of risk. Risk-adjusted return metrics such as the Sharpe ratio address this gap but require more data.

Opportunity cost is not included. An ROI of 8% looks positive in isolation, but if the risk-free alternative (e.g. a savings account) was also earning 8%, the investment added no value. ROI must always be compared to a relevant benchmark.

Cash flow timing is not included. An investment that returns all its gains in year 10 has the same ROI as one that returns gains in year 1, but the latter is far more valuable because of the time value of money. Net Present Value (NPV) and Internal Rate of Return (IRR) address this gap.

Tax is not included. A pre-tax ROI of 15% may become an after-tax ROI of 10% depending on the investment type and jurisdiction. Always calculate after-tax ROI when comparing investments with different tax treatments.

Common mistakes

✗ Excluding transaction costs, commissions, or fees from the investment cost

✓ Total cost must include all costs to acquire the investment: purchase price, brokerage commission, stamp duty, legal fees, and any other acquisition costs. Excluding these inflates the ROI.

✗ Comparing ROI figures from investments of different durations without annualising

✓ A 200% ROI over 20 years (annualised: 5,6% per year) is far inferior to a 50% ROI over 3 years (annualised: 14,5% per year). Always annualise ROI before comparing investments held for different periods.

✗ Using revenue instead of gross profit for marketing ROI calculations

✓ Marketing ROI must deduct the cost of goods or services delivered from the revenue generated. Using gross revenue without deducting COGS overstates the marketing return by ignoring the cost of fulfilment.

✗ Ignoring inflation when evaluating long-term investment ROI

✓ A nominal ROI of 40% over 10 years at 3% annual inflation represents a real ROI of approximately 10% after inflation adjustment. Use the Fisher equation to convert nominal to real returns for long-term comparisons.

Methodology

Basic ROI uses the formula (Net Gain / Cost) x 100. Annualised ROI uses the CAGR formula: (1 + ROI)^(1/years) - 1. All examples include transaction costs in the investment cost base. Marketing ROI uses gross profit as the numerator, not revenue.

ROI does not account for risk, opportunity cost, cash flow timing, or taxes. For investment appraisal, supplement ROI with NPV, IRR, and risk-adjusted return metrics.

Cite this guide

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https://calquify.com/guides/how-to-calculate-roi

Last updated: May 2026

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Frequently asked questions

What is a good ROI?

There is no universal answer. A good ROI depends on the investment type, duration, and risk level. For stock market investments, a long-term annualised ROI of 7 to 10% is considered good and aligns with historical average returns. For business projects, an ROI above the company's cost of capital (typically 8 to 15% for most businesses) is considered acceptable. Marketing ROI above 500% is often cited as a benchmark. Always compare to a relevant benchmark, not an absolute number.

What is the difference between ROI and CAGR?

ROI is the total percentage return over any period. CAGR (Compound Annual Growth Rate) is the annualised equivalent of a total return, calculated as (final value / initial value)^(1/years) - 1. Annualised ROI and CAGR are mathematically equivalent for a single investment with no interim cash flows. CAGR is more commonly used for long-term investment performance reporting.

How do you calculate ROI on a rental property?

Total ROI = ((Sale price - Purchase price - All costs) + Total rental income received) / (Purchase price + All acquisition costs) x 100. All costs include transaction costs, renovation expenses, maintenance, property management fees, and any financing costs. The result is a total ROI over the holding period. Divide by the number of years and apply the annualisation formula to get the annual rate.

Can ROI be negative?

Yes. A negative ROI means the investment lost money. The net gain is negative because the final value is less than the cost. A -25% ROI means you recovered only 75 cents for every euro invested. In the formula, if final value is 7.500 and cost was 10.000: ROI = (7.500 - 10.000) / 10.000 x 100 = -2.500 / 10.000 x 100 = -25%.

Sources & References

› Investopedia — Return on Investment Retrieved 2026-05-17

› CFA Institute — Investment analysis Retrieved 2026-05-17

Formula based on standard mathematical and financial methods. Results are for informational purposes. Last reviewed May 2026. Version 1.