The Basic ROI Formula
Return on investment compares what you gained with what you put in:
ROI = (Final value − Total cost) ÷ Total cost × 100
Buy shares for $10,000, sell them later for $15,000, and your ROI is ($15,000 − $10,000) ÷ $10,000 = 50%. A negative ROI means you lost money: $10,000 that becomes $8,000 is −20%.
ROI's appeal is that it works for almost anything: stocks, a rental property, a new machine for a workshop, an ad campaign or a certification course. Its weakness is that, on its own, it ignores time.
Why You Need to Annualize
A 50% return sounds great, but 50% in one year and 50% over ten years are very different results. To compare investments held for different lengths of time, convert ROI to an annual rate, also called the compound annual growth rate (CAGR):
Annualized ROI = (Final value ÷ Total cost)1 ÷ years − 1
The 50% gain over four years becomes 1.50.25 − 1 = 10.7% per year. A 30% gain over two years is 1.30.5 − 1 = 14.0% per year, so the smaller total return was actually the better investment.
Don't simply divide total ROI by the number of years. That ignores compounding and overstates the annual rate: 50% ÷ 4 = 12.5%, not 10.7%. For periods shorter than a year, annualizing can produce misleadingly huge numbers, so be cautious with returns on a few weeks of data.
Count Every Cost and Every Dollar of Income
An ROI is only as good as its inputs. Include:
- All money in: purchase price, commissions, closing costs, setup fees, improvements and any later contributions.
- Ongoing costs: fund expense ratios, account fees, maintenance, insurance and property taxes. FINRA notes that fees that look small compound into large differences over time.
- All money out: sale proceeds after selling costs, plus dividends, interest and rent you received.
- Taxes, if you want an after-tax ROI. Capital gains, dividend and ordinary income tax rates differ.
Worked example: a stock investment
- Cost: 100 shares at $50 = $5,000, plus $0 commission.
- Income: $120 a year of dividends for 3 years = $360.
- Sale: 100 shares at $58 = $5,800.
- Gain: $5,800 + $360 − $5,000 = $1,160.
- ROI: $1,160 ÷ $5,000 = 23.2%. Annualized over 3 years: 1.2321/3 − 1 ≈ 7.2% per year.
ROI for Real Estate
Property investors usually look at several returns because leverage changes everything:
- Cash-on-cash return: annual pre-tax cash flow ÷ total cash invested (down payment, closing costs, repairs). If you put $60,000 into a rental that nets $4,800 a year after the mortgage and all expenses, cash-on-cash return is 8%.
- Cap rate: net operating income ÷ property value, ignoring financing. It compares properties regardless of how they're bought.
- Total ROI adds appreciation and loan principal paid down to the cash flow.
Our rental property calculator handles the cash-flow side. Remember vacancy, repairs and management; leaving them out is the most common way property ROI gets overstated.
ROI for Marketing and Business Projects
For a campaign or business investment, ROI usually uses profit, not revenue:
Marketing ROI = (Gross profit from the campaign − Campaign cost) ÷ Campaign cost
A $4,000 ad campaign that brings in $20,000 of sales at a 40% gross margin generates $8,000 of gross profit. ROI is ($8,000 − $4,000) ÷ $4,000 = 100%. Using revenue instead would claim 400% and overstate the result. See our profit margin guide for the gross-margin step.
For equipment or software, compare the cost with the savings or added profit over its useful life, and consider the payback period (how many months until cumulative benefits equal the cost). A project with a high ROI but a five-year payback can still strain cash flow.
ROI's Blind Spots
- Risk. ROI doesn't tell you how bumpy the ride was or how likely a loss was. A guaranteed 5% and a speculative 5% are not equal.
- Timing of cash flows. When money goes in and out at different times, like monthly contributions, use the internal rate of return (IRR) or a spreadsheet's XIRR function instead.
- Opportunity cost. A 6% annual return looks fine until you compare it with what a low-cost diversified alternative would have earned over the same years.
- Inflation. For long periods, compare real returns (after inflation) to see whether your purchasing power actually grew.
Quick Reference
| Question | Formula |
|---|---|
| Total return | (End − Cost) ÷ Cost |
| Annual return | (End ÷ Cost)1/years − 1 |
| Ending value at a given annual return | Cost × (1 + rate)years |
| Years to double (rule of 72) | 72 ÷ annual return % |
Run your own numbers in the ROI calculator, or project growth with the compound interest calculator.
ROI vs. Other Return Measures
You'll see several related terms. They answer slightly different questions:
- Total return is the same as basic ROI: price change plus income, as a percentage of what you paid.
- Annualized return or CAGR is the steady yearly rate that would turn your starting amount into your ending amount.
- Internal rate of return (IRR) handles multiple deposits and withdrawals at different times. It is the standard for private investments and real estate projects.
- Yield usually means income only, such as dividends or interest, as a percentage of price. It ignores price changes.
- Return on equity (ROE) and return on assets (ROA) measure a company's profitability, not an individual investment.
Worked Example: Two Choices, One Decision
Which upgrade pays off?
A small bakery is choosing between a $6,000 mixer that saves 8 hours of labor a month and a $2,500 display case expected to add $250 a month in gross profit. Labor costs $20 an hour.
- Mixer: 8 × $20 = $160 a month, or $1,920 a year. Three-year ROI: ($5,760 − $6,000) ÷ $6,000 = −4%. Payback: 37.5 months.
- Display case: $250 × 12 = $3,000 a year. Three-year ROI: ($9,000 − $2,500) ÷ $2,500 = 260%. Payback: 10 months.
Unless the mixer lasts well beyond three years or has other benefits, the display case is the better use of cash.
Whatever you measure, write your assumptions down: the dates, the amounts and which costs you included. That way you can compare future projects on the same basis.
Frequently Asked Questions
What is the formula for ROI?
ROI = (final value − cost) ÷ cost × 100. If you invest $10,000 and end up with $15,000, ROI = $5,000 ÷ $10,000 = 50%.
How do I calculate annualized ROI?
Use (final value ÷ cost)^(1 ÷ years) − 1. A 50% gain over 4 years is (1.5)^(0.25) − 1 ≈ 10.7% per year.
What is a good ROI?
It depends on the risk and the time involved. Compare an investment's annualized return with what you could earn on a lower-risk alternative over the same period.
Does ROI include taxes and fees?
Only if you include them. For a true picture, subtract commissions, fees and taxes from the gain and add every cost to the amount invested.
Sources
- U.S. Securities and Exchange Commission, Investor.gov, "Compound Interest Calculator" and glossary entries on rate of return.
- FINRA, "Understanding Fund Fees and Expenses" (finra.org).
- U.S. Small Business Administration, "Calculate your startup costs" and financial management guidance (sba.gov).
This guide is for education. Figures are current as of October 2026; for tax, lending or legal decisions, check the rules that apply to you.