Finance · Quick Answer

How do you calculate ROI?

ROI = (Gain − Cost) / Cost × 100. For a $1,000 investment that returns $1,250, ROI = ($250/$1,000) × 100 = 25%. Annualized ROI adjusts for time: ((1 + total ROI)^(1/years) − 1) × 100.

The basic ROI formula

ROI (%) = (Net Gain / Investment Cost) × 100

Where Net Gain = Final Value − Initial Cost.

Example

You invest $5,000 in a business and sell your share for $7,500:

Net gain: $2,500
ROI: (2,500 / 5,000) × 100 = 50%

Annualized ROI (CAGR)

ROI alone ignores time. A 50% gain over 1 year is very different from 50% over 10 years.

Annualized ROI = ((End / Start)^(1/years) − 1) × 100

For $5,000 → $7,500 over 3 years: (1.5)^(1/3) − 1 = 14.47%/year

ROI vs related metrics

ROI: measures profitability of a single investment
IRR (Internal Rate of Return): discount rate that makes NPV zero, accounts for timing of multiple cash flows
ROE (Return on Equity): Net Income / Shareholder Equity
ROA (Return on Assets): Net Income / Total Assets

What ROI leaves out

Classic ROI doesn't account for:

Time value of money
Risk
Opportunity cost
Taxes and transaction fees

For serious investment decisions, pair ROI with IRR, NPV, and risk-adjusted return metrics.

Run the numbers

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