How to Calculate ROI (Return on Investment)
Learn the ROI formula, how to include costs, why time matters, and how to compare investments fairly with annualized return.
The short version
Return on investment (ROI) tells you how much you gained or lost relative to what you put in, expressed as a percentage. It is one of the simplest ways to judge whether an investment, a purchase for resale, or a business project was worthwhile.
The ROI formula
ROI = (Final Value − Initial Cost) / Initial Cost × 100
Example: you invest $10,000 and later sell for $12,500. The gain is $2,500, so ROI = 2,500 / 10,000 × 100 = 25%.
ROI can be negative. If you invest $8,000 and the value falls to $6,800, ROI = (6,800 − 8,000) / 8,000 × 100 = −15%.
Include all costs
A fair ROI uses your total cost and your net proceeds. Fees, commissions, taxes, maintenance and any other expenses reduce your real return. In the first example, if you also paid $200 in fees, your net gain is $2,300 and ROI is 23%, not 25%. Leaving costs out makes an investment look better than it was.
ROI ignores time
A 25% ROI sounds great, but it means something very different after one year than after ten. ROI alone does not tell you how long your money was tied up. To compare investments held for different lengths of time, use the annualized return.
Annualized ROI
Annualized ROI = (1 + ROI)1/years − 1
If the 25% gain took 3 years, the annualized ROI is 1.251/3 − 1 ≈ 7.7% per year.
Comparing two investments
- Investment A: 30% ROI over 5 years, which is about 5.4% per year.
- Investment B: 20% ROI over 2 years, which is about 9.5% per year.
Investment A has the higher headline ROI, but Investment B grew faster each year. If you could reinvest the money sooner, B may be the better result. This is why comparing only the headline percentages can be misleading.
What ROI does not show
- Risk: two investments with the same ROI can have very different chances of losing money.
- Inflation: a 5% return in a year with 4% inflation grows your purchasing power much less than it appears.
- Cash flow timing: if money goes in and out at different times, simple ROI is only an approximation.
- Future results: past ROI does not guarantee future returns.
Frequently asked questions
What is a good ROI?
There is no single answer. It depends on the type of investment, the risk, the time period and what else you could have done with the money. Comparing against a realistic alternative, such as a savings account or a broad market index, gives useful context.
Can ROI be more than 100%?
Yes. If you double your money, ROI is 100%. If you triple it, ROI is 200%.
Is ROI the same as profit?
No. Profit is a dollar amount. ROI is that profit as a percentage of the amount invested, which makes different-sized investments easier to compare.
Try it yourself
Use our ROI calculator to enter your own investment amount and final value and see your return as a percentage. Try adding fees to see how much they matter.
This guide is for educational purposes only and is not financial, tax, or legal advice.