How to Calculate ROI

The ROI formula

ROI compares the gain from an investment with its cost. Subtract the cost from what you got back, divide by the cost, and multiply by 100.

• ROI = ((value returned − cost) ÷ cost) × 100
• Example: you spend 10,000 on a marketing campaign that returns 14,500 in gross profit. ROI = (4,500 ÷ 10,000) × 100 = 45%.
• A negative ROI means the investment lost money.

Annualising ROI

A 45% return over three years is not the same as a 45% return over one. Annualising puts investments of different lengths on the same footing.

• Annualised ROI = ((final ÷ initial)^(1 ÷ years) − 1) × 100
• Example: 10,000 growing to 14,500 over two years annualises to about 20.4% per year.
• For periods shorter than a year, you can scale the result, but be careful: short-term results rarely repeat.

What ROI leaves out

ROI is popular because it is simple, but that simplicity hides several things. Use it alongside other measures rather than on its own.

• Risk — two investments with the same expected ROI can have wildly different chances of loss.
• Timing — ROI ignores when cash flows in and out, which is why IRR and NPV exist.
• Costs in kind — time, attention and opportunity cost often do not appear in the "cost" figure.
• Inflation — a 5% return in a year of 6% inflation is a real loss.

Always define your cost consistently. Including your own labour will usually halve the ROI of a side project — which is the honest number.

Typical benchmarks