Return on Investment Calculator
ROI on its own says nothing about time, and a 50% return is excellent over a year and poor over a decade. The annualised figure is the one worth comparing.
Return on investment
50.00%
- ROI
- 50.00%
- Gain
- $6,000.00
- Invested
- $12,000.00
- Returned
- $18,000.00
- Annualised
- 14.47% a year
- Over
- 3.0 years
- The annualised figure is the one to compare against other investments. A 50% return over five years is not the same as 50% in one, and quoting the total without the period is how bad investments get sold.
- Simple ROI ignores when the money moved. For anything with staged costs or returns spread over time, a discounted measure tells you more.
About return on investment
The calculation is simple: what came back, less what went in, over what went in. $12,000 invested returning $18,000 is a $6,000 gain, which is a 50% return.
Its weakness is that it has no time in it. That same 50% over three years is 14.47% a year, which is a completely different proposition from 50% in twelve months. Any comparison between two investments has to be on the annualised figure or it is not a comparison at all.
ROI is also silent about risk, and that omission does more damage than the time one. A 30% return from a savings product and a 30% return from a speculative bet are the same number describing entirely different things. Ranking opportunities by ROI alone systematically favours the riskiest ones.
For business decisions the harder part is usually deciding what to count. Marketing ROI needs the staff time as well as the spend, and it needs a defensible view of which sales would have happened anyway. Equipment ROI needs maintenance, training and downtime as well as the purchase price. An ROI that only counts the invoice is flattering itself.
What it works out
- Return as a percentage of what was invested
- The gain in money
- The annualised rate over the holding period
The formula
ROI = (Returned − Invested) ÷ Invested × 100 Annualised = ((Returned ÷ Invested)^(1÷Years) − 1) × 100
$18,000 back on $12,000 in is a $6,000 gain, and $6,000 over $12,000 is 50%.
The annualised figure takes the year-th root of the multiple rather than dividing by the years. The multiple here is 1.5; the cube root of 1.5 is 1.1447, so the rate is 14.47% a year.
Dividing instead would give 16.7%, which is wrong and too high. It treats each year's gain as happening on the original amount rather than on the amount as it stands, and the error grows with the period.
The single most common mistake in an ROI calculation is not the arithmetic though — it is the numerator. Everything the investment cost belongs in "invested": staff time, training, downtime, the thing you did not do instead. An ROI computed on the purchase price alone is not wrong so much as incomplete in a direction that always flatters.
- Invested
- Everything it cost, including time and anything given up to do it.
- Returned
- Total value back, including the original amount. Not just the profit.
- Years
- The holding period. Without it, ROI cannot be compared to anything.
A worked example
$12,000 invested and $18,000 returned over three years.
That works out to 50.00 %.
- ROI
- 50.00%
- Gain
- $6,000.00
- Invested
- $12,000.00
- Returned
- $18,000.00
- Annualised
- 14.47% a year
- Over
- 3.0 years
Questions
How do I calculate ROI?
Subtract what you put in from what came back, then divide by what you put in. $18,000 returned on $12,000 invested is a $6,000 gain and a 50% ROI.
What is a good ROI?
Meaningless without a period and a risk level attached. 50% is excellent in a year and poor over a decade. Compare the annualised figure against what the money could have earned elsewhere at similar risk.
Why does the annualised figure matter?
Because a raw ROI has no time in it. 50% over three years is 14.47% a year — a completely different investment from 50% in twelve months, and the only way to compare two things with different durations.
Why not just divide the ROI by the years?
It overstates. Dividing 50% by three gives 16.7% where the true compound rate is 14.47%, because it ignores that each year's growth happens on the accumulated amount. The error grows with the period.
What should count as the investment?
Everything it cost, not just the invoice. Staff time, training, downtime during changeover, and what you gave up doing instead. Counting only the purchase price is the most common way an ROI flatters itself.
Does ROI account for risk?
No, and that is its most serious limitation. A safe 30% and a speculative 30% are the same number describing entirely different propositions. Ranking by ROI alone systematically favours the riskiest option.
What is the difference between ROI and ROAS?
Return on ad spend is revenue divided by spend, and it does not subtract the spend. A 3x ROAS is a 200% ROI on the advertising alone — and neither counts the cost of the goods sold, which is why a good ROAS can still lose money.