How to Calculate ROI: Formula, Examples and Common Mistakes

Return on investment, or ROI, is the most widely used way to judge whether something was worth what it cost. It works for a share purchase, a rental property, a marketing campaign, a new machine or a course. This guide shows the formula, how to make results comparable across different time periods, and the mistakes that make ROI figures misleading.

The ROI formula

ROI = (final value − cost) ÷ cost × 100. If you invest $1,000 and it becomes $1,500, the gain is $500 and the ROI is 50 percent. If it becomes $800, the gain is −$200 and the ROI is −20 percent. The result is a percentage of what you put in, which lets you compare investments of different sizes.

A related figure is the return multiple: final value divided by cost. The $1,500 outcome is a 1.5x multiple. Investors often talk about multiples for early-stage projects and percentages for everyday investments.

Why you should annualize

A return of 50 percent means very different things depending on how long it took. Annualized ROI converts the total into a steady yearly rate: (final ÷ cost)^(1 ÷ years) − 1.

• $1,000 to $1,500 in two years: 22.47 percent a year
• $20,000 to $26,000 in three years (30 percent total): 9.14 percent a year
• $1,000 to $1,500 in ten years: 4.14 percent a year

Same 50 percent, three very different stories. When you compare investments, always use the annualized figure or compare over the same period.

What counts as cost

The most common ROI error is leaving costs out. A complete cost includes:

• The purchase price or the amount invested
• Fees, commissions and taxes paid to buy and sell
• Ongoing costs such as maintenance, insurance and subscriptions
• Financing costs, if you borrowed to invest
• The value of your time, if it is significant

A property bought for $200,000, improved for $20,000 and sold for $260,000, with $15,000 of selling costs, has a gain of $260,000 − $15,000 − $220,000 = $25,000. The ROI is $25,000 ÷ $220,000 = 11.4 percent, not the 30 percent you get by comparing $260,000 with $200,000.

ROI for marketing

Advertising ROI compares the profit an activity generated with what you spent on it. If a campaign cost $5,000 and produced $8,000 of profit before the campaign cost, the gain is $3,000 and the ROI is 60 percent. Use profit, not revenue: a campaign that generates $8,000 of sales at a 30 percent margin produced only $2,400 of gross profit and would lose money on a $5,000 spend.

ROI for shares and funds

For a share, include dividends received along with the price change. If you bought for $2,000, received $60 of dividends and sold for $2,300, the gain is $360 and the ROI is 18 percent. If you added money in several instalments, the simple formula is no longer accurate, because each amount was invested for a different time. Use a money-weighted measure such as the internal rate of return for that case.

What ROI does not tell you

• Risk. A guaranteed 5 percent and a risky 5 percent look the same.
• Cash flow timing. Money returned early can be reinvested.
• Opportunity cost. The right question is whether it beat your alternatives.
• Scale. A 100 percent return on $50 is not the same as 10 percent on $50,000.

Use the calculator

The ROI Calculator takes the amount invested, the final value, any fees and the number of years, and returns profit, ROI, return multiple and annualized ROI. For the steady growth rate between two values, use the CAGR Calculator (see CAGR explained). To see how regular deposits compound, try the Compound Interest Calculator, and to judge whether a business idea covers its costs, use the Break-Even Calculator. For margins on sales, the Profit Margin Calculator is the right tool.