Return on Investment (ROI) Formula
Calculate ROI using (Net Profit / Cost) × 100.
Compare investment efficiency for stocks, real estate, ad spend, and business projects with annualized return.
The Formula
Return on Investment measures the gain or loss from an investment relative to its cost. It is expressed as a percentage, making it easy to compare different investments.
Variables
| Symbol | Meaning |
|---|---|
| ROI | Return on Investment (as a percentage) |
| Net Profit | Total earnings minus total cost (Revenue - Cost) |
| Cost of Investment | The total amount spent on the investment |
Example 1
You buy stocks for $10,000 and sell them for $13,500.
Net Profit = $13,500 - $10,000 = $3,500
ROI = (3500 / 10000) × 100
ROI = 0.35 × 100
ROI = 35% — You earned a 35% return on your investment.
Example 2
A business spends $50,000 on a marketing campaign that generates $72,000 in revenue.
Net Profit = $72,000 - $50,000 = $22,000
ROI = (22000 / 50000) × 100
ROI = 0.44 × 100
ROI = 44% — The campaign returned 44 cents for every dollar spent.
When to Use It
Use the ROI formula when:
- Comparing the profitability of different investments
- Evaluating whether a business project was worth the cost
- Deciding where to allocate your money for the best returns
- Measuring the effectiveness of marketing campaigns or capital expenditures
Key Notes
- Formula: ROI = (Net Profit / Cost) × 100%: Net profit is the final value minus the initial cost. A positive ROI means the investment gained value; a negative ROI means a loss.
- Ignores time: Basic ROI doesn't account for how long the investment was held. A 50% ROI over 10 years is far less impressive than a 50% ROI in 1 year. Use annualized ROI or IRR for time-sensitive comparisons.
- Annualized ROI: Annualized ROI = (1 + ROI)^(1/n) − 1, where n is the number of years. This makes ROIs over different time periods directly comparable.
- Doesn't capture risk: Two investments can have the same ROI but very different risk levels. Risk-adjusted metrics like the Sharpe ratio are more informative when comparing investments.
- Include all costs: A complete ROI calculation should include maintenance, taxes, transaction fees, and opportunity costs — not just the initial purchase price and sale proceeds.