How to Calculate ROI: Formula, Examples & Calculator
For informational purposes only, not financial advice. Full disclaimer
Return on Investment (ROI) is the most widely used metric for evaluating whether an investment or expenditure was worth it. The formula is straightforward: ROI = (Net Profit / Cost of Investment) × 100. If you invested $50,000 and received $65,000 back, your ROI is ($15,000 / $50,000) × 100 = 30%. You earned 30 cents for every dollar invested.
ROI works for virtually any financial decision: stock purchases, real estate, business equipment, marketing campaigns, education, and home improvements. Its simplicity is both its greatest strength and its limitation, which is why understanding when to use it — and when to use alternative metrics — is critical.
Enter your investment cost and returns to see ROI, annualized return, and total profit in seconds.
Try the ROI CalculatorI have used ROI calculations to compare investments across EdTech, DefTech, and consumer mobile apps over the past 20 years. The biggest lesson: raw ROI without annualizing is misleading. A 60% return over five years sounds great until you compare it to a 40% return over two years, which actually performed better on an annual basis.
Alex B.
The Basic ROI Formula
ROI = ((Final Value - Initial Investment) / Initial Investment) × 100This is equivalent to: ROI = (Net Profit / Cost) × 100. Both formulations give the same result. The key is including ALL costs in the denominator and ALL returns in the numerator. For a stock purchase, include brokerage fees in the cost. For real estate, include closing costs, renovations, and carrying costs. Leaving out costs inflates ROI artificially.
Worked Examples
Stock Investment
Example Calculation
You buy 100 shares of a stock at $45/share ($4,500 total) plus a $10 commission. Two years later, you sell at $62/share ($6,200) with another $10 commission. You received $150 in dividends.
- Total cost: $4,500 + $10 = $4,510
- Total return: $6,200 - $10 + $150 = $6,340
- Net profit: $6,340 - $4,510 = $1,830
- ROI: ($1,830 / $4,510) × 100 = 40.6%
Your ROI is 40.6% over 2 years. To annualize this, use: Annualized ROI = (1 + 0.406)^(1/2) - 1 = 18.6% per year.
Real Estate Investment
Example Calculation
You buy a rental property for $250,000 with $15,000 in closing costs and $20,000 in renovations. After 5 years, you sell for $320,000 with $18,000 in selling costs. During ownership, you received $72,000 in net rental income.
- Total investment: $250,000 + $15,000 + $20,000 = $285,000
- Total returns: $320,000 - $18,000 + $72,000 = $374,000
- Net profit: $374,000 - $285,000 = $89,000
- ROI: ($89,000 / $285,000) × 100 = 31.2%
Your total ROI is 31.2% over 5 years, or approximately 5.6% annualized. Including rental income is essential — without it, the ROI would appear to be only 6%.
Marketing Campaign
A business spends $8,000 on a Facebook ad campaign that generates $28,000 in attributable revenue with $16,000 in costs of goods sold. Net profit from the campaign: $28,000 - $16,000 - $8,000 = $4,000. ROI: ($4,000 / $8,000) × 100 = 50%. For every dollar spent on ads, the business earned $1.50 back. A 50% marketing ROI is strong — many businesses target 100-300% but consider anything above 0% worthwhile.
Annualized ROI: Comparing Different Time Periods
Raw ROI does not account for time. A 50% return in 2 years is much better than a 50% return in 10 years. To compare investments held for different periods, annualize the ROI.
Annualized ROI = (1 + ROI)^(1/years) - 1Investment A earned 80% ROI in 5 years: annualized = (1.80)^(1/5) - 1 = 12.5% per year. Investment B earned 50% ROI in 2 years: annualized = (1.50)^(1/2) - 1 = 22.5% per year. Despite the lower total ROI, Investment B was the better performer on an annualized basis. Always compare investments using annualized returns.
When ROI Falls Short
ROI has real limitations. It does not account for risk — a 10% return on Treasury bonds is not the same as 10% on cryptocurrency. It ignores the time value of money for complex cash flows (irregular payments, dividends, reinvestment). And it can be manipulated by choosing which costs to include or exclude.
For investments with multiple cash flows over time, use Internal Rate of Return (IRR). For comparing growth rates across different periods, use CAGR (Compound Annual Growth Rate). For investments with very different risk profiles, consider risk-adjusted returns like the Sharpe ratio. ROI is best for simple, clean comparisons: "I spent X, I got back Y, what percentage did I earn?"
ROI Benchmarks by Category
Stock market (S&P 500): about 10% annualized nominal return, 7% after inflation. Real estate: 8-12% annualized including rental income and appreciation. Bonds: 4-6% annualized. Small business investments: highly variable, but 15-25% annualized is generally considered a strong return. Marketing spend: 100-300% ROI is considered good; above 500% is exceptional.
The most common ROI mistake is forgetting to include all costs: transaction fees, taxes, maintenance, opportunity cost of your time, and carrying costs. An honest ROI calculation includes every dollar that went into the investment.
Frequently Asked Questions
What is a good ROI?+
What is the difference between ROI and CAGR?+
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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor for decisions about your specific situation.