How to Calculate ROI: Formula, Examples & Investment Analysis
Learn how to calculate Return on Investment (ROI) for any investment. Includes simple and annualized ROI formulas, real-world examples, and common pitfalls.
The Simple ROI Formula
ROI = (Net Profit / Cost of Investment) × 100. If you invest $10,000 and sell for $13,000, your ROI is ($3,000 / $10,000) × 100 = 30%. This formula works for any investment: stocks, real estate, business projects, or marketing campaigns. Remember that net profit means total return minus all costs, including fees, taxes, and maintenance.
Annualized ROI for Fair Comparisons
A 30% ROI over 5 years is very different from 30% over 1 year. To compare investments fairly, use annualized ROI: Annualized ROI = ((1 + ROI)^(1/years) - 1) × 100. That 30% over 5 years is actually 5.39% per year. Over 1 year, it stays 30%. The S&P 500 has averaged about 10% annualized returns historically, which is a useful benchmark for any investment analysis.
ROI Across Different Investments
Stock market (index funds): historically 7-10% annually after inflation. Real estate: 8-12% including appreciation and rental income. Bonds: 2-5% annually. Small business: highly variable, 15-30%+ for successful ventures. Education: a bachelor's degree averages $1.2 million in additional lifetime earnings. Marketing spend: e-commerce businesses target 400-800% ROAS (return on ad spend). Each investment type has different risk profiles and time horizons.
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Common ROI Mistakes
Mistake #1: Ignoring time value of money (receiving $1,000 in 10 years is worth less than $1,000 today). Mistake #2: Forgetting fees and taxes (a fund with 1% annual fee on a 7% return actually yields ~6%). Mistake #3: Cherry-picking time periods (crypto's ROI looks amazing from 2010-2021, terrible from 2021-2023). Mistake #4: Confusing unrealized gains with actual ROI (your stock portfolio hasn't returned anything until you sell). Mistake #5: Not accounting for opportunity cost (the return you miss by not investing elsewhere).
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Frequently Asked Questions
What is a good ROI?
It depends on the investment type and risk. For stocks, 7-10% annually is good (matching market average). For real estate, 8-12% is strong. For business projects, 15%+ justifies the risk. Any ROI above inflation (currently ~3-4%) preserves purchasing power. Higher-risk investments should demand higher ROI to compensate.
How is ROI different from CAGR?
ROI gives total return regardless of time period. CAGR (Compound Annual Growth Rate) shows the smoothed annual return. A $10,000 investment growing to $20,000 over 5 years has 100% ROI but 14.87% CAGR. CAGR is better for comparing investments of different durations.
Does ROI include dividends?
Total ROI should include all returns: capital appreciation (price increase), dividends, interest, and rental income. Many people mistakenly calculate ROI using only price change, missing 2-3% annual dividends that significantly impact long-term returns.