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Return on investment (ROI) is the simplest measure of whether something paid off: the profit expressed as a percentage of what you put in. It lets you compare very different investments — a stock, a rental, a marketing campaign — on one common scale.
Enter what you invested and what it's now worth; add a holding period for the annualized figure.
How is it calculated?
The ROI formula
ROI = (final value − initial investment) ÷ initial investment × 100
| Result | Meaning |
|---|---|
| ROI % | Total return relative to what you invested |
| Net profit | final value − initial investment |
| Annualized ROI | The equivalent yearly rate over the holding period |
Why the annualized figure matters
A 50% ROI sounds great — but over ten years it's mediocre, and over six months it's excellent. Total ROI ignores time, so comparing investments of different lengths on it is misleading. The annualized ROI, ((final ÷ initial)^(1/years) − 1) × 100, converts everything to a yearly rate you can compare fairly.
What ROI leaves out
Plain ROI doesn't account for the timing of cash flows, risk, taxes or fees. Two investments with the same ROI can differ hugely once you factor those in. For a stream of cash flows at different dates, an IRR or NPV calculation is more accurate; ROI is the quick headline.
Where it helps
Sizing up a stock or property gain, judging a marketing spend, or comparing business projects. Include all costs in the "initial investment" — fees, renovation, setup — and everything received in the "final value" for an honest number.
Worked example
You invest 1,000 and later the position is worth 1,500. The net profit is 500 and the ROI is (1,500 − 1,000) ÷ 1,000 × 100 = 50%. If that took 3 years, the annualized ROI is ((1,500 ÷ 1,000)^(1/3) − 1) × 100 ≈ 14.5% per year — a fairer basis for comparing it with a one-year investment.
FAQ
How do I calculate ROI?+
Subtract the initial investment from the final value, divide by the initial investment and multiply by 100. Turning 1,000 into 1,500 is a 50% ROI.
What is a good ROI?+
It depends entirely on the investment type and time frame, so use the annualized figure to compare. Historically, broad stock markets have returned roughly 7–10% a year on average.
What is annualized ROI?+
It converts total ROI into an equivalent yearly rate: ((final ÷ initial)^(1/years) − 1) × 100. It lets you compare investments held for different lengths of time.
Can ROI be negative?+
Yes. If the final value is less than the initial investment, the ROI is negative — you made a loss. Selling a 1,000 investment for 800 is a −20% ROI.
What is the difference between ROI and IRR?+
ROI is a single overall percentage that ignores when cash flows occur; IRR accounts for the timing of multiple cash flows and is more accurate for investments with ongoing income or staged costs.