Calculating ROI: Return on Investment Formula
Learn how to calculate ROI with the standard return on investment formula, plus examples, limitations, and how to compare opportunities.
Searching calculating ROI usually means you want to measure how efficiently money produced a return. ROI stands for return on investment.
ROI Formula
ROI = (Net profit / Cost of investment) x 100
You can also write net profit as:
Final value - Initial cost
Example
Suppose you invest $2,000 and later sell for $2,500.
Net profit = 2,500 - 2,000 = 500
ROI = 500 / 2,000 x 100 = 25%
Why ROI Is Useful
ROI helps compare:
- Marketing spend
- Business projects
- Side hustles
- Equipment purchases
- Stock or property gains
Limitation of ROI
ROI does not automatically account for time. A 20% ROI earned in one year is very different from a 20% ROI earned over five years. For longer comparisons, annualized return can be more useful.
The Bottom Line
To calculate ROI, subtract cost from final value, divide by cost, and multiply by 100. It is a quick way to compare returns, but time and risk still matter.
How to Calculate: Step-by-Step Guide
Find net profit
Subtract the cost of the investment from the value or profit gained.
Divide by cost
Use the original investment cost as the denominator.
Convert to percent
Multiply by 100 to express ROI as a percentage.