How to Calculate ROI (Return on Investment)
Return on Investment answers the simplest question in business and investing: for every dollar I put in, how many did I get back? Here is how to calculate it — and how to avoid the trap of comparing unequal investments.
The Basic ROI Formula
You invest $10,000 and it is worth $15,000: ROI = (15,000 − 10,000) ÷ 10,000 × 100 = 50%. The same formula works for business projects, marketing campaigns, property and stocks — as long as you capture ALL costs in the denominator, including fees.
The Timing Problem
A 50% ROI earned in one year is excellent; earned over ten years is mediocre. Comparing raw ROIs across different holding periods is comparing apples to oranges. The fix is annualization:
The $10,000 → $15,000 investment over 3 years has a CAGR of (1.5)^(1/3) − 1 ≈ 14.5% per year. Now it can be compared fairly with any other investment's annual return.
A Worked Comparison
Investment A: $5,000 → $7,000 in 2 years. ROI = 40%, CAGR = (1.4)^0.5 − 1 ≈ 18.3%. Investment B: $20,000 → $26,000 in 3 years. ROI = 30%, CAGR = (1.3)^(1/3) − 1 ≈ 9.1%. Despite the lower headline ROI, A is the better investment per year.
Common Mistakes
- Forgetting fees and taxes in the cost — they change the real ROI.
- Comparing ROIs with different time horizons (use CAGR).
- Using ROI to justify risk — ROI says nothing about the chance of losing money.
Article FAQ
How do I calculate ROI?
Divide the profit (final value minus cost) by the cost and multiply by 100.
What is CAGR?
Compound Annual Growth Rate — the annualized return that produces the same growth, allowing fair comparison across different periods.
What is a good ROI?
It depends on risk and time. Annualized figures of 7–10% are common long-term equity benchmarks; higher expected returns come with higher risk.