Return on investment, or ROI, is one of the simplest and most useful measures in personal finance and business. It tells you how much you gained or lost compared with what you put in. Whether you are judging a share purchase, a rental property, a course you paid for or an advertising campaign, ROI gives you a common yardstick. This guide explains how to calculate it correctly and how to avoid being misled.
The basic ROI formula
ROI = (final value − initial investment) ÷ initial investment × 100
The result is a percentage. A positive number is a gain; a negative number is a loss.
Example: You invest 10,000 and it grows to 13,500. The gain is 3,500. ROI = 3,500 ÷ 10,000 × 100 = 35%.
If the same investment fell to 8,500, the ROI would be (8,500 − 10,000) ÷ 10,000 × 100 = −15%.
Why time matters: annualized return
A 35% return sounds great, but over how long? 35% in one year is excellent; 35% over ten years is poor. To compare investments held for different periods, convert the ROI into a yearly rate, often called the compound annual growth rate (CAGR):
Annualized return = (final value ÷ initial value)1/years − 1
Example: The 10,000 that became 13,500 over three years: (13,500 ÷ 10,000) = 1.35. The cube root of 1.35 is about 1.1052. So the annualized return is about 10.5% per year. This number lets you compare the investment with a savings account, an index fund or another opportunity on equal terms.
Include all costs and income
For an accurate ROI, use the real total amounts:
- Add income received: dividends, interest or rent increase the final value.
- Subtract costs: purchase fees, management fees, maintenance, taxes and transaction costs reduce your return.
Example (property): You buy a flat for 200,000 and spend 10,000 on fees and renovation, so your total investment is 210,000. Over five years you receive 40,000 in net rent and then sell for 230,000. Total value is 270,000. ROI = (270,000 − 210,000) ÷ 210,000 × 100 = 28.6% over five years, about 5.2% per year.
ROI in business and marketing
Companies use ROI for projects, equipment and advertising. If a campaign costs 2,000 and generates 5,000 in extra profit, the ROI is (5,000 − 2,000) ÷ 2,000 × 100 = 150%. It is important to count profit, not just revenue, and to include all the costs of running the campaign.
What ROI does not tell you
- Risk. A high ROI may have required high risk. Two investments with the same ROI are not equal if one swings wildly and the other is steady.
- Time. Simple ROI ignores the holding period, which is why annualized return is more useful for comparisons.
- Inflation. A 3% return when prices rise 3% leaves you with no real gain.
- Opportunity cost. You should compare the return with the best alternative use of your money.
- Taxes. Your after-tax return may be noticeably lower.
- Liquidity. Some investments, such as property, are hard to sell quickly.
Common mistakes
- Comparing ROIs of different time periods without annualizing.
- Forgetting fees and taxes.
- Dividing by the final value instead of the initial investment.
- Treating past returns as a guarantee of future results.
Calculate it quickly
Use our ROI Calculator to enter the amount invested, the final value and the number of years, and see the gain, total ROI and annualized return instantly. This article is educational and not investment advice; all investments involve risk, including the loss of capital.