Calculate return on investment and compare profitability
Return on Investment (ROI) measures the profitability of an investment as a percentage of its cost. It is one of the most widely used financial metrics because it is simple, comparable across different investment types, and easy to understand.
ROI = (Return − Investment) ÷ Investment × 100
A $1,000 investment that returns $1,300 has an ROI of 30%. A $50,000 marketing campaign that generates $80,000 in revenue has an ROI of 60%. ROI expresses profit relative to cost, making it easy to compare a small investment with a large one.
| Investment type | Typical annual ROI |
|---|---|
| US stock market (S&P 500) | ~10% nominal, ~7% real |
| Real estate | 8–12% (including appreciation) |
| Bonds (investment grade) | 3–6% |
| High-yield savings | 4–5% (current rates) |
| Small business | 15–30%+ |
| Digital marketing | 200–500%+ (varies widely) |
ROI is useful but has important limitations. It does not account for time — a 50% ROI over 10 years is far less impressive than 50% in one year. It does not account for risk — two investments with identical ROI can have dramatically different risk profiles. And it does not account for cash flow timing — an investment that returns money gradually is different from one that returns it all at the end.
For time-adjusted returns, use annualised ROI or Internal Rate of Return (IRR). For risk-adjusted returns, use metrics like Sharpe ratio.
To compare investments held for different periods, calculate annualised ROI:
Annualised ROI = (1 + ROI/100)^(1/years) − 1
A 50% total ROI over 3 years is an annualised ROI of approximately 14.5%. A 50% ROI over 1 year is 50% annualised. Converting to annualised returns makes multi-year investments comparable to single-year ones.
Subtract your initial investment from the total return, divide by the initial investment, and multiply by 100. If you invested $5,000 and received $6,500, ROI = (6,500 − 5,000) ÷ 5,000 × 100 = 30%.
Context matters. For stock market investments, 7–10% annually is considered good. For real estate, 8–12%. For business investments or marketing, expectations are typically higher — 20–50% or more. Compare ROI to your cost of capital and opportunity cost, not to an absolute number.
Yes — when the return is less than the investment, ROI is negative. A negative ROI means you lost money. For example, investing $10,000 and getting back $8,000 gives an ROI of −20%.
Profit is the absolute amount gained (Return − Investment). ROI is profit expressed as a percentage of the investment. Profit tells you how much you made; ROI tells you how efficient your investment was relative to its cost.
Calculate ROI for each option using the same time period. Annualise ROI if the investment periods differ. Then consider risk — a higher-ROI investment is not automatically better if it carries substantially more risk or is less liquid.