What Is ROI (Return on Investment)? Formula and Examples

Return on Investment (ROI) is a percentage that measures how much money you made or lost on an investment relative to how much you spent. It is the universal yardstick for evaluating whether an investment was worth it — whether you are analyzing a stock purchase, a marketing campaign, a real estate deal, or a new piece of business equipment.

An ROI of 20% means you earned $20 for every $100 invested. An ROI of -15% means you lost $15 for every $100 invested. Simple, intuitive, and applicable to almost any financial decision.

The ROI Formula

If you bought stock for $10,000 and sold it for $13,000, your ROI is (($13,000 - $10,000) / $10,000) × 100 = 30%. If you spent $5,000 on a marketing campaign that generated $18,000 in revenue, the ROI is (($18,000 - $5,000) / $5,000) × 100 = 260%. The formula works the same way for any investment.

ROI in Practice: Real-World Examples

Stock Market Investment

You buy 100 shares of a stock at $50/share ($5,000 total). Two years later, the stock is at $68/share and you received $200 in dividends. Your total return is (100 × $68 + $200) - $5,000 = $2,000. ROI = $2,000 / $5,000 × 100 = 40%. That 40% was earned over 2 years, so the annualized return is roughly 18.3% per year.

Real Estate

You buy a rental property for $200,000 (including closing costs and repairs). It generates $18,000/year in rent and costs $8,000/year in expenses (taxes, insurance, maintenance). Annual net income is $10,000. Annual ROI = $10,000 / $200,000 × 100 = 5%. If the property also appreciates 3% per year ($6,000), total ROI becomes ($10,000 + $6,000) / $200,000 × 100 = 8%.

Business Equipment

Your bakery buys a $15,000 bread oven that increases production capacity and generates an additional $8,000 in annual profit. After 2 years, total additional profit is $16,000. ROI = ($16,000 - $15,000) / $15,000 × 100 = 6.7%. But by year 3, total profit reaches $24,000, and ROI jumps to 60%. Equipment ROI often looks poor initially and improves with time.

Why ROI Is Useful

• Easy to calculate and understand — anyone can grasp a percentage return
• Universal — works for stocks, real estate, business decisions, marketing, education
• Enables comparison — you can compare the ROI of completely different investments
• Decision-making tool — helps prioritize where to allocate limited capital

Limitations of ROI

ROI has one major blind spot: it ignores time. A 50% ROI over 1 year is excellent. A 50% ROI over 10 years is mediocre — only about 4.1% per year. When comparing investments with different time horizons, use annualized ROI (also called CAGR — Compound Annual Growth Rate) instead of raw ROI.

ROI also does not account for risk. A 12% ROI from a government bond and a 12% ROI from a speculative startup look identical on paper, but the risk profiles are completely different. And basic ROI ignores taxes, fees, and inflation — all of which reduce your real return. A pre-tax ROI of 15% might be 10% after taxes and 7% after inflation.

ROI vs. Other Return Metrics

CAGR (Compound Annual Growth Rate) shows annualized returns, making it better for comparing investments over different time periods. IRR (Internal Rate of Return) accounts for the timing and size of multiple cash flows, making it ideal for complex investments with irregular income. ROE (Return on Equity) specifically measures returns generated from shareholders' equity, used in corporate finance.

For quick, straightforward comparisons, ROI is the right tool. For multi-year investments, use CAGR. For complex investments with multiple cash inflows and outflows (like rental properties or businesses), use IRR.

What Is a Good ROI?

It depends entirely on the context. The S&P 500 has averaged roughly 10% per year (before inflation) since 1926. So any investment should be measured against that benchmark — if you cannot beat 10% annually, you might be better off in an index fund. Real estate investors typically target 8-12% annual returns. Business investments often require 15-25% ROI to justify the risk and effort. Marketing campaigns should aim for at least 300-500% ROI to account for overhead and opportunity costs.