How to Calculate ROI: Formulas, Examples, and Common Mistakes

What Is ROI?

Return on Investment (ROI) is a performance metric that measures the profitability of an investment relative to its cost. It answers the fundamental question: "For every dollar I put in, how many dollars did I get back?"

ROI is one of the most widely used financial metrics because it's simple, universal, and directly comparable across different investments.

The Basic ROI Formula

ROI = (Net Return / Cost of Investment) × 100

Where:

Net Return = Final Value − Cost of Investment

Example: You invest $10,000 in stocks. After 2 years, your investment is worth $13,500.

Net Return = $13,500 − $10,000 = $3,500 ROI = ($3,500 / $10,000) × 100 = 35%

Annualized ROI (CAGR)

A 35% ROI sounds good, but over 2 years or 10 years makes a big difference. To compare investments over different time periods, calculate the annualized ROI (Compound Annual Growth Rate):

Annualized ROI = [(Final Value / Initial Value)^(1/years) - 1] × 100

For our example (35% over 2 years):

Annualized ROI = [(13,500 / 10,000)^(1/2) - 1] × 100 = [(1.35)^0.5 - 1] × 100 = [1.1619 - 1] × 100 = 16.19% per year

Compare: A different investment with 50% ROI over 5 years:

Annualized ROI = [(1.50)^(1/5) - 1] × 100 = 8.45% per year

Despite having a higher headline ROI (50% vs 35%), the second investment performs worse on an annualized basis.

Always annualize ROI when comparing investments over different time periods.

What to Include as Cost and Gain

Cost (denominator):

Purchase price of asset
Transaction fees and commissions
Setup costs, installation
Ongoing maintenance costs
Time costs (if calculating labor-inclusive ROI)

Gain (numerator):

Increase in asset value
Income generated (dividends, rent, revenue)
Cost savings (if the investment reduced other costs)
Minus: transaction fees on exit

Be consistent. Omitting costs inflates ROI; including costs that shouldn't be there deflates it.

Marketing ROI

Marketing teams calculate ROI to justify campaigns:

Marketing ROI = (Revenue Generated - Marketing Cost) / Marketing Cost × 100

Example: $50,000 email campaign generates $180,000 in attributable revenue:

ROI = ($180,000 - $50,000) / $50,000 × 100 = 260%

The challenge is attribution — how do you know which revenue was generated by which campaign? Multi-touch attribution models exist but are complex. Simple last-click attribution understates early funnel investments.

A rough benchmark: Marketing ROI above 200% (3:1 return) is generally considered good; above 500% (6:1) is excellent.

Real Estate ROI

Cash-on-cash return (for rental properties):

Cash-on-cash = Annual Pre-tax Cash Flow / Total Cash Invested × 100

If you invest $80,000 down payment on a rental property that generates $9,600 in annual net cash flow (rent minus expenses):

Cash-on-cash = $9,600 / $80,000 × 100 = 12%

Total ROI (including appreciation):

If after 5 years the property appreciated by $50,000 and you received $48,000 total in net cash flow:

Total return = $50,000 + $48,000 = $98,000 ROI = $98,000 / $80,000 × 100 = 122.5% over 5 years Annualized = [(1 + 1.225)^(1/5) - 1] × 100 = 17.4%

ROI vs IRR vs NPV

ROI is simple and intuitive, but ignores the time value of money and assumes a single-period investment.

IRR (Internal Rate of Return): The discount rate at which NPV equals zero. Accounts for the timing of all cash flows — better for projects with multiple cash flows over time. A project with a 15% IRR means you're earning 15% annually on the money still invested.

NPV (Net Present Value): Converts all future cash flows to their present value using a discount rate. A positive NPV means the investment creates value; negative means it destroys value. NPV is better than IRR for absolute comparison (IRR doesn't tell you the scale of returns).

For simple comparisons: Use ROI. For capital budgeting and project comparison: Use IRR and NPV. For time-sensitive multi-period investments: Always annualize.

Limitations of ROI

Ignores time value of money — $1 today is worth more than $1 next year. Basic ROI doesn't account for this.
Ignores risk — Two investments with identical ROI can have very different risk profiles. Risk-adjusted returns (Sharpe ratio) are better for comparing investments with different volatility.
Manipulation — ROI can be gamed by choosing what to include/exclude as cost, or by the period of measurement.
Opportunity cost — A 10% ROI is good if you could only get 5% elsewhere. It's bad if the market returned 20%.

Use our free ROI Calculator to calculate simple, annualized, and marketing ROI instantly.