Return On Investment (ROI) calculator (Sales & Investment option)

Whether you’re evaluating a potential purchase or analyzing an existing asset, you need to know how to measure the return on investment (ROI).

Are you considering an investment but need confirmation that the gains outweigh the costs by a certain ratio?

Have your business partners requested profitability insights prior to making a major acquisition?

In this article, we’ll cover the essentials of ROI, including how to calculate it and maximize it.

We’ll also provide an ROI calculator that can do the math for you or validate your numbers.

By the end of this article, you’ll know how to calculate ROI for use cases ranging from investments to marketing.

You’ll also understand both the limitations of ROI and common calculation mistakes.

Here’s what we’ll cover

ROI calculator

This calculator works in 2 different ways.

It can:

1. Calculate ROI based on the amount invested and the amount returned over time
2. Calculate investment return and growth over a period of time

To calculate ROI, select the “Investment ROI” option. Input the amount invested and the amount returned (actual or projected).

Then, enter either the start and end dates, or the total years of investment.

Press “Calculate” to see the total gain, investment ROI, and annualized ROI.

We’ll explain these metrics in depth below.

To calculate investment growth, select the “Growth calculator” option.

Input the amount invested and the ongoing contributions (including the frequency).

Then, enter the years of growth and the interest rate.

Press “Calculate” to see the total contribution, total interest, investment worth, and investment ROI.

You’ll also see a chart that breaks down the contributions and balance for the investment by year.

What is ROI?

Return on investment, or ROI, is a metric that measures the performance of an investment by comparing the gain from the investment to its initial cost.

ROI is typically expressed as a percentage.

ROI serves 2 main purposes:

Measures the return from investments or acquisitions, which helps you to clarify past performance for reporting purposes.

You can also use ROI to evaluate the gain or loss from past investments or endeavours.

Forecasts the rate of return, which helps you to gauge profitability and you can forecast the potential returns before investing in stocks, funds, or real estate.

You can use it to compare a portfolio of investments to decide which are better for further investment, or to look at new ventures to decide what might be worth investment.

For example, when acquiring a new company or if you want to purchase assets for your business, such as machinery.

ROI is used widely in business to track performance in reporting and making decisions.

When used for marketing, ROI is a useful tool for you to review where budgets are best allocated and to see if specific campaigns have added value to the business.

Although, as with any measurement, it is important to measure campaigns in isolation to avoid influence from other factors that might show a false picture.

Return on investment is an easy-to-understand metric that offers a simple overview of performance and is universally understood in business.

However, it does have limitations and can be misleading if it’s not presented or provided with context.

Note that it is possible for investments to generate a positive or negative return:

• When the return outperforms the cost, the ROI is positive. This is known as being in the black.
• When the cost exceeds the return, the ROI is negative. This is known as being in the red.

How do you calculate ROI?

The quickest way to calculate ROI is to use our calculator above.

To do your own manual calculations, you can also use the ROI calculation formulas below.

To learn to calculate ROI manually, try running your own calculations with the formulas and then check them against the calculator.

Standard ROI formula

ROI = ((Value of Investment – Cost of Investment) / Cost of Investment) x 100%

For example, suppose you invest $100,000 and end up with a return of $150,000.

Your ROI would be:

ROI = (($150,000 – $100,000) / $100,000 x 100% = 50%

The basic ROI formula above doesn’t account for the investment’s time frame.

To factor in the holding time, use the annualized ROI formula below instead.

Annualized ROI formula

Annualized ROI = ((1 + ROI) ^ (1 / n) – 1)) × 100%

n =number of years the investment is held

For example, suppose you achieved 50% ROI over the course of 2 years.

Your annualized ROI would be:

Annualized ROI = ((1 + 0.5) ^ (1 / 2) – 1)) × 100% = 22.5%

ROI calculation examples

Let’s walk through some examples.

Calculating ROI for marketing

Suppose you managed a marketing campaign with an initial cost of $5,000.

And the campaign generated a return of $25,000. The ROI would be:

ROI = (($25,000 – $5,000) / $5,000) x 100% = 400%

Calculating ROI for business investment

Say your company is considering a business investment priced at $500,000.

And you’ve projected a future valuation of $2 million. The ROI would be:

ROI = (($2,000,000 – $500,000) / $500,000) x 100% = 300%

If the valuation is projected for 10 years from now, the annualized ROI would be:

Annualized ROI = ((1 + 3) ^ (1 / 10) – 1)) × 100% = 14.9%

Calculating ROI for real estate

Now, suppose your company invested in real estate at an up-front cost of $25,000.

And the real estate ultimately generated a return of $10,000.

The ROI would be:

ROI = (($10,000 – $25,000) / $25,000) x 100% = -60%

Because the cost exceeds the return, the ROI is negative.

If the investment period lasted 5 years, the annualized ROI would be:

Annualized ROI = ((1 -0.6) ^ (1 / 5) – 1)) × 100% = -16.7%

What is the difference between ROI and annualized ROI?

For a standard ROI that is measured between a start and an outcome, the time frame is not a factor that affects the result.

Even over a year or a decade, the ROI remains the same so long as neither the cost nor the gain changes.

A basic ROI would be used to measure investment in a marketing campaign, or the purchase of an asset.

For an annualized ROI, the holding period of the investment is accounted for in the calculation and factors in compounding, which incorporates how an asset generates additional earnings either from capital gains, or from interest over time, or from both.

As you can see in the examples above, longer holding periods lead to bigger differences between ROI and annualized ROI.

Annualized ROI reflects an investment’s annual performance, but it can also be calculated in quarters, halves, and other time frames by turning the holding period into fractions of a year.

Annualized ROI is best used for investments with returns that are either less predictable or that have variable interest rates.

For example, you can use it when evaluating stocks or funds.

This metric is also helpful for comparing the performance of multiple investments. Since it factors in compound interest, annualized ROI simplifies the process of comparing investments with different holding periods.

Limitations of ROI

Despite being a widely used metric, ROI does have some limitations that need to be considered:

Doesn’t account for the holding period

The standard ROI calculation doesn’t reflect the time period for the investment, which may result in an overly simplistic metric.

To assess how the holding period affects the efficiency of the investment, use annualized ROI.

Doesn’t include all relevant costs

Some investments continue to generate additional costs over time.

For example, real estate investments typically incur property taxes, mortgage insurance, and maintenance costs.

If you don’t factor these costs into the calculation, you’ll end up with an inaccurate ROI.

This can provide a skewed assessment of the investment, which may lead to uninformed decisions.

Doesn’t factor in contributions

Many investments have a one-time initial cost.

However, others have monthly, quarterly, or annual contributions.

The standard ROI formula doesn’t account for ongoing contributions.

To calculate ROI for an investment with ongoing contributions, use our growth calculator above.

It reveals investment ROI, investment worth, and balance over time.

Mistakes when calculating ROI

ROI is one of the simplest and most straightforward metrics for measuring profitability.

However, it’s important to avoid common mistakes when calculating ROI:

Neglecting to estimate costs accurately

Without a complete list of the cost of the investment, acquisition, or business initiative, you won’t be able to forecast ROI accurately.

Before calculating ROI, make sure to consider hidden costs like maintenance or licensing.

Measuring the wrong outcomes

This mistake is a particular concern for marketing campaigns.

When calculating ROI, always measure the metrics that contribute to the company’s bottom line.

Rather than factoring in engagement, for example, measure revenue.

Failing to consider risk

Every investment carries some level of risk, from the value of the investment to the timeline for the acquisition.

To ensure you can absorb the probable risk level, calculate ROI based on various likely outcomes.

Forgetting to weigh non-monetary benefits

ROI measures profitability.

However, almost every investment also brings non-monetary benefits that can change the math completely.

Consider factors like corporate reputation or employee satisfaction when reviewing outcomes.

Confusing profit with cash

While investments are cash, ROI doesn’t reflect a cash outcome.

Instead, it indicates profit.

To get a more complete financial picture of an investment, consider the cash flow rather than the profit.

Not measuring ROI over time

It’s crucial to measure ROI before pursuing an investment. But that shouldn’t be the only time you consider this metric.

Instead, continue to measure the actual ROI of existing investments so you can make informed decisions about future investments.

How to maximize your ROI

You can maximize return on investment by taking these actions:

Consider a riskier investment

Generally, the higher the risk level, the higher the ROI. To maximize ROI, consider increasing your exposure to risk.

Contribute more frequently

Investments like stocks and bonds allow additional contributions over time.

To maximize ROI, contribute increased amounts more frequently.

Increase the holding period

Over time, compound interest can increase the worth of investments significantly.

To maximize ROI, consider longer-term investments.

What is an average or good ROI?

Each type of investment has its own average ROI.

Here are some benchmarks to consider as you evaluate investment performance:

• Real estate can be subject to ups and downs on a short-term basis and can deliver higher returns, but over long-term periods, it is seen as a low-risk investment with a modest return average.
• Stocks allow you to benefit from a company’s growth, stocks tend to be good long-term investments. However, when the company experiences losses, the ROI can be lower or can even be negative.
• Bonds have fixed yields based on factors like the issuer and the duration. As a result, they tend to be less risky investments, but in recent years they have seen unprecedented volatility, which has contributed to an increase in the ROI.
• Gold, in terms of uncertainty, was traditionally seen as a safe-haven investment, but that has changed. Now, because of quantitative easing, ultra-low interest rates and the rise of cryptocurrency, gold has lost its assurance due to significant changes in investors’ behaviour in recent years. The price of gold has been fluctuating considerably, making it more of a volatile investment compared to bonds.

However, when you consider an investment, it’s important to go beyond these benchmarks alone.

For example, investment time is a key factor.

Generally, the longer the holding period, the higher you want the ROI to make the investment a worthwhile use of capital.

You should also factor in risk tolerance.

If you have a higher tolerance for risk, you may be open to more volatility in exchange for a higher ROI.

Likewise, if you have a lower tolerance for risk, you may accept a lower ROI in exchange for stable growth.

Make sure to consider your own key performance indicators (KPIs) as well.

Even if an investment performs well based on industry or historical benchmarks, it must align with your personal goals to be considered good.

How is ROI different from ROE?

While ROI reflects the performance of an investment, return on equity (ROE) reflects the performance of a company.

You calculate it by dividing the company’s net income by the shareholders’ equity.

Let’s compare the 2 metrics side by side.

Return On Investment – ROI	Return On Equity – ROE
Measures the profitability of an investment.	Measures the profitability of a corporation.
Factors in initial investment cost and return.	Factors in net income and shareholder equity.
ROI = ((Value of Investment – Cost of Investment) / Cost of Investment) x 100%	ROE = Net Income / Shareholder Equity x 100%
If an investment has an initial cost of $100,000 and a return of $125,000, the ROI is 25%.	If a company has a net income of $1 million and shareholder equity of $4 million, the ROE is 25%.
Helps with comparing the efficiency of multiple investments.	Helps with comparing the efficiency of multiple companies.
May show skewed results, as it doesn’t reflect the holding period.	May show skewed results, as it can mask inconsistent income.

Final thoughts

Once you understand how to calculate ROI and when to use annualized ROI, you can make informed decisions about short- and long-term investments.

Use our ROI calculator to run the numbers instantly.

Or use it to confirm your calculations and reinforce your confidence in your investments.

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