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ROI, or return on investment, measures a return against the cost or capital invested. A common formula is ROI (%) = (total proceeds − total cost) ÷ total cost × 100. For example, if an investment costs $1,000 and produces $1,200 in proceeds, its ROI is 20%: ($1,200 − $1,000) ÷ $1,000 × 100. That result is meaningful only if you define what counts as proceeds, cost, and the period measured.
How to calculate basic investment ROI
Use the same calculation consistently when comparing investments:
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ROI (%) = (total proceeds − total cost) ÷ total cost × 100
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For a stock, price change is not the whole return if you received dividends. Fidelity illustrates one share bought for $50, sold or valued at $60, and paying a $2 dividend: ($60 − $50 + $2) ÷ $50 = 24%, before taxes owed. Trading costs belong in the calculation when they apply.
A positive ROI means proceeds exceeded the costs included in the calculation; a negative ROI means the included loss exceeded income or other proceeds. Neither result says by itself whether the investment was worthwhile.
Define what counts as return and cost
ROI can change when the numerator or denominator changes. State whether proceeds include income, whether cost includes fees and other expenses, and whether the result is before or after taxes. For a property or business project, leaving out maintenance, taxes, sale fees, legal costs, or other relevant expenses can make the result look stronger than it is.
Also identify the period. A 25% total return over a few months is not equivalent to 25% over several years. A percentage without its time span cannot show the pace of return.
Annualize ROI before comparing different holding periods
For a single beginning value and ending value, annualized ROI expresses the compounded yearly rate equivalent to the total holding-period result:
Annualized ROI = (ending value ÷ beginning value)1 / years − 1
CFI illustrates the distinction with a 21.6% ordinary return over part of a year and a 35.5% annualized return. They answer different questions: the first is the total result for the period; the second is its compounded yearly equivalent. CFI’s ROI guide gives the formula and example.
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When there are contributions or withdrawals at different dates, a single beginning-to-ending calculation may not represent the timing of the cash flows. Internal rate of return (IRR) is one measure that accounts for dated cash flows.
Business ROI uses a different capital base
In managerial accounting, ROI may mean income divided by average capital assets rather than an investor’s proceeds divided by purchase cost. OpenStax presents this measure as:
ROI = income ÷ average capital assets
It can also be broken into two operating measures:
ROI = sales margin × asset turnover
- Sales margin = income ÷ sales revenue
- Asset turnover = sales revenue ÷ average capital assets
The sales-revenue terms cancel, leaving income divided by average capital assets. The breakdown shows whether a business earns ROI through more income per sales dollar, more sales per dollar of assets, or both. OpenStax covers this accounting measure.
The capital-asset definition matters. A company may use fixed, productive, or operating assets, and gross versus net book value changes the denominator. OpenStax’s bakery-division examples report ROI figures of 35%, 42%, and 27%; they are classroom illustrations, not industry benchmarks.
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Accounting rate of return is not the same as total investment return
ACCA uses “accounting rate of return,” also called ROI, for annual accounting profit as a percentage of investment. In its example, the same project yields 20% using initial investment as the denominator and 36% using average investment. The differing answers show why an accounting ROI should disclose its investment base.
Accounting rate of return uses profit rather than cash flow and does not account for the timing of cash flows or the time value of money. ACCA notes: “The accounting rate of return, unlike investment appraisal methods such as net present value, considers profits, not cash flows.” ACCA explains accounting rate of return.
What is a good ROI?
There is no universal percentage that makes an ROI good. The answer depends on the investment objective, asset type, holding period, and risk. CFI gives 8% as an illustration that might exceed expectations for fixed income but fall short for a high-growth venture; it is not a current market standard. Riskier investments may offer higher potential returns, but that does not guarantee higher realized returns.
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Before comparing options, put the calculations on consistent footing:
- Use the same period, or compare annualized returns.
- Include income and costs consistently, and identify tax treatment.
- Use comparable definitions of invested capital.
- Consider risk and financing, not just the percentage.
Leverage can raise ROI calculated on personal capital because less of your own money is invested, but it can also magnify losses. Include borrowing costs and compare financed and cash-funded scenarios rather than treating the leveraged percentage as a like-for-like return.
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What ROI does not tell you
- How long the return took: simple ROI is time-blind; annualize a single start-to-end result when comparing periods.
- When interim cash flows occurred: total ROI does not capture the timing of contributions and distributions; IRR can account for dated cash flows.
- How much risk was taken: ROI is a return measure, not a risk measure.
- Whether the calculation is complete: omitted fees, taxes, maintenance, or other costs can distort the result.
- Whether profit equals cash received: accounting ROI based on profit is distinct from cash-flow-based appraisal methods such as net present value or IRR.
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