ROI Calculator

What return on investment measures

ROI expresses profit as a percentage of what you put in. It is the most widely quoted investment metric precisely because it is so simple, and that simplicity is also its main weakness — it says nothing about how long the money was tied up or how much risk was taken to earn it.

A positive ROI means you finished ahead, a negative one means you lost money, and 100% means you doubled your money rather than merely getting it back. That last point is worth fixing in memory: doubling is 100% ROI, not 200%.

A worked example

You buy equipment for 250,000, and over the following period it generates 340,000 in revenue attributable to it.

• Net profit: 340,000 - 250,000 = 90,000
• ROI: 90,000 / 250,000 x 100 = 36%

If that 36% was earned over one year it is excellent. Over eight years it is roughly 3.9% a year, which is likely worse than leaving the money in a deposit account. The raw ROI figure cannot tell you which of those two situations you are in, which is the single most important thing to understand about it.

Annualised ROI

To compare investments held for different lengths of time, convert to an annual rate. This is the same calculation as CAGR:

A 36% total return over 8 years annualises to 3.93%. A 36% return over 6 months annualises to about 84.9%. Same ROI, wildly different investments.

Read down any column and the effect is stark: a headline that sounds impressive over a decade is often a mediocre annual return.

Getting the initial cost right

Most bad ROI figures come from an understated denominator rather than an overstated numerator. The initial cost should include everything you actually spent to get into and out of the investment:

• Purchase price plus brokerage, commissions and transaction fees.
• Taxes and duties paid on acquisition, such as stamp duty or registration.
• Setup, installation, training and integration for a business asset — often a substantial fraction of the sticker price.
• Ongoing costs over the holding period: maintenance, storage, insurance, management fees, subscriptions.
• Selling costs, which reduce the final value: agent commission, transfer fees, capital gains tax.

A property bought at 5,000,000 and sold at 5,750,000 looks like a 15% return. Add 5% in acquisition costs, 2% in selling costs and five years of maintenance and tax, and the real figure is frequently negative. For a marketing campaign the equivalent trap is counting media spend but not staff time.

ROI, ROAS and payback period

Three related metrics answer different questions, and mixing them up is common in marketing reporting.

• ROI is profit over cost. Spend 100, earn 400 in revenue at 50% margin, and profit is 200 minus the 100 spend, so ROI is 100%.
• ROAS is revenue over ad spend, ignoring margin entirely. The same campaign has a ROAS of 4. A ROAS above 1 can still be a loss-making campaign if margins are thin.
• Payback period is how long the investment takes to return its cost. It says nothing about total profit but everything about cash flow risk.

What ROI leaves out

ROI is a single number describing something a single number cannot capture. Before acting on it, consider that it ignores time unless you annualise; ignores risk, so a 12% return from government bonds and a 12% return from a speculative venture look identical; ignores the timing of cash flows, treating money received in year one the same as money received in year ten; and ignores opportunity cost — a 7% return is only good if nothing safer was paying 8%. It also says nothing about scale: a 300% ROI on a 1,000 investment makes 3,000, while a 15% ROI on 10,000,000 makes 1,500,000.

For projects with irregular cash flows over multiple years, net present value and internal rate of return are the appropriate tools. ROI is best used as a quick comparison between similar investments over similar periods.

Frequently asked questions