How to calculate ROI
ROI = (amount returned - amount invested) / amount invested x 100. Example: invest $10,000 and get back $13,000. Net profit is $3,000, so ROI = 3,000 / 10,000 = 30%.
ROI vs annualized ROI
Plain ROI ignores time. Annualized ROI shows the yearly rate: ((1 + ROI) ^ (1 / years)) - 1. A 30% return over 3 years is about 9.1% annualized, which makes different time horizons easier to compare.
What is a good ROI?
It depends on context and risk. Broad stock-market returns have historically averaged roughly 7% to 10% a year; a marketing campaign may need several times its spend; a software purchase is often judged on payback period.
Marketing ROI and ROAS
Marketing ROI = (revenue from campaign - campaign cost) / campaign cost. ROAS = revenue / ad spend, usually shown as a ratio like 4:1. Use ROI when profit after costs matters and ROAS for a quick revenue-per-dollar read.
ROI vs ROE vs rate of return
ROI measures profit relative to the cost of a specific investment. Return on equity measures profit relative to shareholders' equity. Rate of return usually implies a time period, so make sure you are comparing the same metric.
Is the investment actually worth it?
A positive ROI alone does not make an investment wise. Compare it against your hurdle rate or cost of capital, the minimum return you require for the risk. If ROI does not clear that bar, the money may be better used elsewhere.
The limitations of ROI
ROI is simple but blunt. It ignores risk, ignores the time value of money, and can change based on how you define cost and gain. Use annualized ROI for time comparisons and weigh risk separately.
Real-estate ROI example
For property, ROI = (annual rental profit + appreciation) / total cash invested. Put $50,000 down and net $6,000 a year after expenses, and cash-on-cash ROI is 12% before appreciation.
Can ROI be negative?
Yes. If you get back less than you put in, ROI is negative and the investment lost money. A -20% ROI means you recovered 80 cents on the dollar.