How to Calculate ROI (Return on Investment)

Whether you are weighing up an investment, a business decision, or a marketing spend, one number cuts through the noise: return on investment. Knowing how to calculate ROI lets you compare very different opportunities on a level playing field, because it expresses your gain as a simple percentage of what you put in. The basic formula takes seconds, and this guide walks through it with a clear example, then shows how to make ROI fairer by accounting for time. It also covers the limitations worth knowing before you rely on the number. To project investment growth over time, our compound interest calculator is a useful companion. Figures use generic currency units.

What is ROI?

Return on investment (ROI) measures how much you gained or lost relative to what you invested, expressed as a percentage. A positive ROI means a profit; a negative ROI means a loss. Because it is a ratio, you can use it to compare a stock, a property, a course, or an ad campaign side by side.

That simplicity is its strength and its weakness: it is quick and universal, but it does not, by itself, account for how long the investment took or how risky it was.

The ROI formula

First work out your profit by subtracting the cost from the final value. Then divide by the cost and multiply by 100 to turn it into a percentage.

A worked example

Suppose you invest 1,000 and later sell for 1,300.

1. Net profit: 1,300 – 1,000 = 300.
2. Divide by cost: 300 / 1,000 = 0.30.
3. Multiply by 100: 0.30 x 100 = 30% ROI.

In plain English: you turned 1,000 into 1,300, a 30% return. If instead you had sold for 900, your profit would be minus 100 and your ROI would be minus 10%, a loss.

Project your returns

ROI tells you the past return; to estimate future growth, our compound interest calculator shows how an investment could grow over time. Pair it with our guide on simple vs compound interest to understand the mechanics.

Annualized ROI for fair comparison

A 30% return is impressive in one year but mediocre over ten. To compare investments held for different lengths of time, use annualized ROI, which converts the total return into a yearly rate.

For our example over 3 years: (1,300 / 1,000) to the power of one-third, minus 1, is about 9.1% a year. Always annualize when the time periods differ, or you will draw the wrong conclusion.

Limitations of ROI

• It ignores time unless you annualize it.
• It ignores risk: a high ROI from a risky bet is not directly comparable to a safe one.
• It can miss hidden costs like fees, taxes, and maintenance if you leave them out of the cost figure.
• It says nothing about scale: a 50% ROI on 100 is only 50, while 10% on 100,000 is 10,000.

Frequently asked questions

How do I calculate ROI?

Subtract the cost of the investment from its final value to get your net profit, divide that by the cost, and multiply by 100 to get a percentage. For example, investing 1,000 and ending with 1,300 gives a profit of 300, and 300 divided by 1,000 times 100 is a 30% ROI. A negative result means a loss.

What is a good ROI?

It depends on the investment and time frame. For long-term stock market investing, an average annual return of around 7 to 10% is often considered good. A one-off project might target much higher. Always compare ROI against the risk taken and the time involved, and annualize returns before comparing investments of different lengths.

What is the difference between ROI and annualized ROI?

ROI is the total percentage return over the whole holding period, regardless of how long that was. Annualized ROI converts that total into an average yearly rate, so you can fairly compare investments held for different lengths of time. A 30% total return over three years is only about 9.1% annualized.

Can ROI be negative?

Yes. If the final value is less than the cost, your net profit is negative, giving a negative ROI, which means you lost money. For example, investing 1,000 and ending with 800 is a profit of minus 200, or minus 20% ROI. Negative ROI is a clear signal the investment lost value.

Does ROI account for time and risk?

Not on its own. Basic ROI ignores how long the investment took and how risky it was. To handle time, use annualized ROI. For risk, you must judge it separately, since a high ROI from a volatile bet is not directly comparable to a modest, safe return. Always consider time and risk alongside the ROI figure.

The bottom line

To calculate ROI, divide your net profit by the cost and multiply by 100, so turning 1,000 into 1,300 is a 30% return. When comparing investments of different lengths, annualize the figure to get a fair yearly rate. Remember ROI ignores time, risk, and scale unless you account for them, so treat it as a powerful starting point, not the final word. Model future growth with our compound interest calculator.

Further reading

For authoritative background on this topic, see Return on investment on Wikipedia.