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What Is Return on Investment or ROI?

How to calculate roi, interpreting roi, roi example, an alternative roi calculation, annualized roi.

• Investments and Annualized ROI

Combining Leverage With ROI

The problem of unequal cash flows, advantages of roi, disadvantages of roi, the bottom line.

• Corporate Finance
• Financial Analysis

ROI: Return on Investment Meaning and Calculation Formulas

ROI is an important measure of an investment's performance, but it has some drawbacks. Here is how to calculate it.

Return on investment (ROI) is a ratio that measures the profitability of an investment by comparing the gain or loss to its cost. It helps assess the potential return of investments on things like stocks or business ventures. ROI is usually presented as a percentage and can be calculated using a specific formula.

Key Takeaways

• Return on investment (ROI) is an approximate measure of an investment's profitability.
• ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
• ROI has a wide range of uses. It can be used to measure the profitability of stock shares, to decide whether to purchase a business, or to evaluate the success of a real estate transaction.
• One disadvantage of ROI is that it doesn't account for how long an investment is held.

ROI can be calculated using either of two methods.

First method:

ROI = Net Return on Investment  Cost of Investment × 100 % \begin{aligned}&\text{ROI} = \frac { \text{Net Return on Investment} }{ \text { Cost of Investment} } \times 100\% \\\end{aligned} ​ ROI =  Cost of Investment Net Return on Investment ​ × 100% ​

Second method:

ROI = FVI − IVI Cost of Investment × 100 % where: FVI = Final value of investment IVI = Initial value of investment \begin{aligned}&\text{ROI} = \frac { \text{FVI} - \text{IVI} }{ \text{Cost of Investment} } \times 100\% \\&\textbf{where:} \\&\text{FVI} = \text{Final value of investment} \\&\text{IVI} = \text{Initial value of investment} \\\end{aligned} ​ ROI = Cost of Investment FVI − IVI ​ × 100% where: FVI = Final value of investment IVI = Initial value of investment ​

Investopedia / Mira Norian

When interpreting ROI calculations, it's important to keep a few things in mind. First, ROI is typically expressed as a percentage because it is intuitively easier to understand than a ratio. Second, the ROI calculation includes the net return in the numerator because returns from an investment can be either positive or negative.

When ROI calculations yield a positive figure, it means that net returns are in the black (because total returns exceed total costs). But when ROI calculations yield a negative figure, it means that the net return is in the red because total costs exceed total returns.

Finally, to calculate ROI with the highest degree of accuracy, total returns and total costs should be considered. For an apples-to-apples comparison between competing investments , annualized ROI should be considered.

The ROI formula can be deceptively simple. It depends on an accurate accounting of costs. That's easy in the case of stock shares, for example. But it is more complicated in other cases, such as calculating the ROI of a business project that is under consideration.

Assume an investor bought 1,000 shares of the hypothetical company Worldwide Wickets Co. at $10 per share. One year later, the investor sold the shares for $12.50. The investor earned dividends of $500 over the one-year holding period . The investor spent a total of $125 on trading commissions in order to buy and sell the shares.

The ROI for this investor can be calculated as follows:

ROI = ( $ 12.50 − $ 10 ) × 1000 + $ 500 − $ 125 $ 10 × 1000 × 100 = 28.75 % \begin{aligned}\text{ROI} &= \frac { ( \$12.50 - \$10 ) \times 1000 + \$500 - \$125 }{ \$10 \times 1000 } \times 100 \\&= 28.75\% \\\end{aligned} ROI ​ = $10 × 1000 ( $12.50 − $10 ) × 1000 + $500 − $125 ​ × 100 = 28.75% ​

Here is a step-by-step analysis of the calculation:

• To calculate net returns, total returns and total costs must be considered. Total returns for a stock result from capital gains and dividends. Total costs include the initial purchase price and any trading commissions paid.
• In the above calculation, the gross capital gain (before commissions) from this trade is ($12.50 - $10.00) x 1,000. The $500 amount refers to the dividends received by holding the stock, while $125 is the total commissions paid.

If you further dissect the ROI into its component parts, it is revealed that 23.75% came from capital gains and 5% came from dividends. This distinction is important because capital gains and dividends are taxed at different rates.

ROI = Capital Gains% − Commission% + Dividend Yield \begin{aligned}&\text{ROI} = \text{Capital Gains\%} - \text{Commission\%} + \text{Dividend Yield} \\\end{aligned} ​ ROI = Capital Gains% − Commission% + Dividend Yield ​

Capital Gains = ( $ 2500 ÷ $ 10 , 000 ) × 100 = 25.00 % Commissions = ( $ 125 ÷ $ 10 , 000 ) × 100 = 1.25 % Dividend Yield = ( $ 500 ÷ $ 10 , 000 ) × 100 = 5.00 % ROI = 25.00 % − 1.25 % + 5.00 % = 28.75 % \begin{aligned}&\text{Capital Gains} = ( \$2500 \div \$10,000 ) \times 100 = 25.00\% \\&\text{Commissions} = ( \$125 \div \$10,000 ) \times 100 = 1.25\% \\&\text{Dividend Yield} = ( \$500 \div \$10,000 ) \times 100 = 5.00\% \\&\text{ROI} = 25.00\% - 1.25\% + 5.00\% = 28.75\% \\\end{aligned} ​ Capital Gains = ( $2500 ÷ $10 , 000 ) × 100 = 25.00% Commissions = ( $125 ÷ $10 , 000 ) × 100 = 1.25% Dividend Yield = ( $500 ÷ $10 , 000 ) × 100 = 5.00% ROI = 25.00% − 1.25% + 5.00% = 28.75% ​

A positive ROI means that net returns are positive because total returns are greater than any associated costs. A negative ROI indicates that the total costs are greater than the returns.

If, for example, commissions were split, there is an alternative method of calculating this hypothetical investor's ROI for the Worldwide Wickets Co. investment. Assume the following split in the total commissions: $50 when buying the shares and $75 when selling the shares.

IVI = $ 10 , 000 + $ 50 = $ 10 , 050 FVI = $ 12 , 500 + $ 500 − $ 75 FVI = $ 12 , 925 ROI = $ 12 , 925 − $ 10 , 050 $ 10 , 050 × 100 ROI = 28.75 % where: IVI = Initial value (cost) of investment FVI = Final value of investment \begin{aligned}&\text{IVI} = \$10,000 + \$50 = \$10,050 \\&\text{FVI} = \$12,500 + \$500 - \$75 \\&\phantom{ \text{FVI} } = \$12,925 \\&\text{ROI} = \frac { \$12,925 - \$10,050 }{ \$10,050} \times100 \\&\phantom{ \text{ROI} } = 28.75\% \\&\textbf{where:}\\&\text{IVI} = \text{Initial value (cost) of investment} \\&\text{FVI} = \text{Final value of investment}\end{aligned} ​ IVI = $10 , 000 + $50 = $10 , 050 FVI = $12 , 500 + $500 − $75 FVI = $12 , 925 ROI = $10 , 050 $12 , 925 − $10 , 050 ​ × 100 ROI = 28.75% where: IVI = Initial value (cost) of investment FVI = Final value of investment ​

Annualized ROI helps account for a key omission in standard ROI—namely, how long an investment was held.

The annualized ROI calculation provides a solution for one of the key limitations of the basic ROI calculation. The basic ROI calculation does not take into account the length of time that an investment is held, also referred to as the holding period. The formula for calculating annualized ROI is as follows:

Annualized ROI = [ ( 1 + ROI ) 1 / n − 1 ] × 100 % where: n = Number of years investment is held \begin{aligned}&\text{Annualized ROI} = \big [ ( 1 + \text{ROI} ) ^ {1/n} - 1 \big ] \times100\% \\&\textbf{where:}\\&n = \text{Number of years investment is held} \\\end{aligned} ​ Annualized ROI = [ ( 1 + ROI ) 1/ n − 1 ] × 100% where: n = Number of years investment is held ​

Assume a hypothetical investment that generated an ROI of 50% over five years. The simple annual average ROI of 10%–which was obtained by dividing ROI by the holding period of five years–is only a rough approximation of annualized ROI. This is because it ignores the effects of compounding , which can make a significant difference over time. The longer the time period, the bigger the difference between the approximate annual average ROI, which is calculated by dividing the ROI by the holding period in this scenario, and annualized ROI. 

From the formula above,

Annualized ROI = [ ( 1 + 0.50 ) 1 / 5 − 1 ] × 100 = 8.45 % \begin{aligned}&\text{Annualized ROI} = \big [ ( 1 + 0.50 ) ^ {1/5 } - 1 \big ] \times100 = 8.45\% \\\end{aligned} ​ Annualized ROI = [ ( 1 + 0.50 ) 1/5 − 1 ] × 100 = 8.45% ​

This calculation can also be used for holding periods of less than a year by converting the holding period to a fraction of a year.

Assume an investment that generated an ROI of 10% over six months.

Annualized ROI = [ ( 1 + 0.10 ) 1 / 0.5 − 1 ] × 100 = 21 % \begin{aligned}&\text{Annualized ROI} = \big [ ( 1 + 0.10 ) ^ {1 / 0.5 } - 1 \big ] \times100 = 21\% \\\end{aligned} ​ Annualized ROI = [ ( 1 + 0.10 ) 1/0.5 − 1 ] × 100 = 21% ​

In the equation above, the numeral 0.5 years is equivalent to six months.

Comparing Investments and Annualized ROI

Annualized ROI is especially useful when comparing returns between various investments or evaluating different investments.

Assume that an investment in stock X generated an ROI of 50% over five years, while an investment in stock Y returned 30% over three years. You can determine what the better investment was in terms of ROI by using this equation:

AROI x = [ ( 1 + 0.50 ) 1 / 5 − 1 ] × 100 = 8.45 % AROI y = [ ( 1 + 0.30 ) 1 / 3 − 1 ] × 100 = 9.14 % where: AROI x = Annualized ROI for stock X AROI y = Annualized ROI for stock Y \begin{aligned}&\text{AROI}_x = \big [ ( 1 + 0.50 ) ^ { 1/5 } -1 \big ] \times100 = 8.45\% \\&\text{AROI}_y = \big [ (1 + 0.30 ) ^ {1/3 } - 1 \big ] \times100 =9.14\% \\&\textbf{where:}\\&\text{AROI}_x = \text{Annualized ROI for stock X} \\&\text{AROI}_y = \text{Annualized ROI for stock Y} \\\end{aligned} ​ AROI x ​ = [ ( 1 + 0.50 ) 1/5 − 1 ] × 100 = 8.45% AROI y ​ = [ ( 1 + 0.30 ) 1/3 − 1 ] × 100 = 9.14% where: AROI x ​ = Annualized ROI for stock X AROI y ​ = Annualized ROI for stock Y ​

According to this calculation, stock Y had a superior ROI compared to stock X.

Leverage can magnify ROI if the investment generates gains. By the same token, leverage can amplify losses if the investment proves to be a losing investment.

Assume that an investor bought 1,000 shares of the hypothetical company Worldwide Wickets Co. at $10 per share. Assume also that the investor bought these shares on a 50% margin (meaning they invested $5,000 of their own capital and borrowed $5,000 from their brokerage firm as a margin loan).

Exactly one year later, this investor sold the shares for $12.50. The shares had earned dividends of $500 over the one-year holding period. The investor also spent a total of $125 on trading commissions when buying and selling the shares.

The calculation must also account for the cost of buying on margin. In this example, the margin loan carried an interest rate of 9%.

When calculating the ROI on this example, there are a few important things to keep in mind. First, the interest on the margin loan ($450) should be considered in total costs. Second, the initial investment is now $5,000 because of the leverage employed by taking the margin loan of $5,000. 

ROI = ( $ 12.50 − $ 10 ) × 1000 + $ 500 − $ 125 − $ 450 ( $ 10 × 1000 ) − ( $ 10 × 500 ) × 100 = 48.5 % \begin{aligned}\text{ROI} &= \frac { ( \$12.50 - \$10 ) \times 1000 + \$500 - \$125 - \$450 }{ ( \$10 \times 1000 ) - ( \$10 \times 500 ) } \times 100 \\&= 48.5\% \\\end{aligned} ROI ​ = ( $10 × 1000 ) − ( $10 × 500 ) ( $12.50 − $10 ) × 1000 + $500 − $125 − $450 ​ × 100 = 48.5% ​

Thus, even though the net dollar return was reduced by $450 on account of the margin interest, ROI is still substantially higher at 48.50% (compared with 28.75% if no leverage was employed).

As another example, consider if the share price fell to $8.00 instead of rising to $12.50. In this situation, the investor decides to take the loss and sell the full position.

Here is the calculation for ROI in this scenario:

ROI = [ ( $ 8 − $ 10 ) × 1000 ] + $ 500 − $ 125 − $ 450 ( $ 10 × 1000 ) − ( $ 10 × 500 ) × 100 = − $ 2 , 075 $ 5 , 000 = − 41.5 % \begin{aligned}\text{ROI} &= \frac { \big [ ( \$8 - \$10) \times1000 \big ] + \$500 - \$125 - \$450 }{ ( \$10 \times 1000) - (\$10 \times 500) } \times 100 \\&= - \frac { \$2,075 }{ \$5,000} \\&= -41.5\% \\\end{aligned} ROI ​ = ( $10 × 1000 ) − ( $10 × 500 ) [ ( $8 − $10 ) × 1000 ] + $500 − $125 − $450 ​ × 100 = − $5 , 000 $2 , 075 ​ = − 41.5% ​

In this case, the ROI of -41.50% is much worse than an ROI of -16.25%, which would have occurred if no leverage had been employed.

When evaluating a business proposal, it's possible that you will be contending with unequal cash flows. In this scenario, ROI may fluctuate from one year to the next.

This type of ROI calculation is more complicated because it involves using the internal rate of return (IRR) function in a spreadsheet or calculator.

Assume you are evaluating a business proposal that involves an initial investment of $100,000. (This figure is shown under the "Year 0" column in the Cash Outflow row in the following table.)

The investment will generate cash flows over the next five years; this is shown in the Cash Inflow row. The row called Net Cash Flow sums up the cash outflow and cash inflow for each year.

Investopedia / Sabrina Jiang

Using the IRR function, the calculated ROI is 8.64%.

The final column shows the total cash flows over the five-year period. Net cash flow over this five-year period is $25,000 on an initial investment of $100,000. If this $25,000 was spread out equally over five years, the cash flow table would then look like this:

In this case, the IRR is now only 5.00%.

The substantial difference in the IRR between these two scenarios—despite the initial investment and total net cash flows being the same in both cases—has to do with the timing of the cash inflows. In the first case, substantially larger cash inflows are received in the first four years. Considering the time value of money , these larger inflows in the earlier years have a positive impact on IRR.

The biggest benefit of ROI is that it is a relatively uncomplicated metric. It is easy to calculate and intuitively easy to understand.

Due to its simplicity, ROI has become a standard, universal measure of profitability. As a measurement, it is not likely to be misunderstood or misinterpreted because it has the same connotations in every context.

There are some disadvantages to the ROI measurement. First, it does not take into account the holding period of an investment, which can be an issue when comparing investment alternatives.

For example, assume investment X generates an ROI of 25%, while investment Y produces an ROI of 15%. One cannot assume that X is the superior investment unless the time frame of each investment is also known. It's possible that the 25% ROI from investment X was generated over a period of five years, while the 15% ROI from investment Y was generated in only one year.

Calculating annualized ROI can overcome this hurdle when comparing investment choices.

No Risk Adjustment

A second disadvantage of ROI is that it does not adjust for risk.

Investment returns have a direct correlation with risk: the higher the potential returns, the greater the possible risk. This can be observed firsthand in the stock market, where small-cap stocks are likely to have higher returns than large-cap stocks but also are likely to have significantly greater risks.

An investor who is targeting a portfolio return of 12%, for example, would have to assume a substantially higher degree of risk than an investor whose goal is a return of 4%. If that investor hones in on the ROI number without also evaluating the associated risk, the eventual outcome may be very different from the expected result.

Some Costs May Be Omitted

ROI figures can be inflated if all possible costs are not included in the calculation. This can happen deliberately or inadvertently.

For example, in evaluating the ROI on a piece of real estate , all associated expenses should be considered. These include mortgage interest , property taxes , and insurance. They also include maintenance costs, which can be unpredictable.

These expenses can subtract from the expected ROI. Without including all of them in the calculation, the ROI figure may be grossly overstated.

Some Issues May Be Ignored

Finally, like many profitability metrics, ROI considers only financial gains when evaluating the returns on an investment. It does not consider ancillary benefits, such as social or environmental costs.

A relatively new ROI metric, known as social return on investment (SROI), helps to quantify some of these benefits for investors.

What Is ROI?

Return on investment, or ROI, is a straightforward measurement of the bottom line. How much profit (or loss) did an investment make after considering its costs?

ROI is used for a wide range of business and investing decisions. It can be used to calculate the actual returns on an investment, to project the potential return on a new investment, or to compare the potential returns on a number of investment alternatives.

For example, if a business owner is considering expanding into a new product line, the ROI formula can be used to chart out its costs and estimate its potential returns. If an entrepreneur is evaluating a new project, an ROI calculation can help determine if the likely return is worth the expense. If an investor is evaluating past or future stock purchases, the ROI formula is a quick indicator of real or potential stock performance.

How Is Return on Investment (ROI) Used?

ROI is a straightforward method of calculating the return on an investment. It can be used to measure profit or loss on a current investment or to evaluate the potential profit or loss of an investment that you are considering making.

Keep in mind that ROI omits a key factor: the length of time that it took to earn that profit (or make that loss). Obviously, a stock that makes a 10% return in one year is preferable to a stock that makes a 10% return in four years.

For this reason, the formula for annualized return on investment may be a better choice than the basic formula for return on investment. (Both are shown above.)

How Do You Calculate ROI for Real Estate?

The return on investment (ROI) formula remains the same whether you're evaluating the performance of a single stock or considering the potential profit of a real estate investment. (See formula above.)

Some investments are more complicated to evaluate than others, though, particularly when it comes to costs. A ROI on a real estate investment must include all of the potential costs that may be involved, including such matters as maintenance, repairs, insurance, and lost rental income.

Return on investment (ROI) is a simple and intuitive metric of the profitability of an investment. There are some limitations to this metric, including the facts that it does not consider the holding period of an investment and is not adjusted for risk. Despite these limitations, ROI is a key metric used by business analysts to evaluate and rank investment alternatives.

CHRON. " How to Calculate the ROI on a Project ."

Roofstock. " What Is a Good ROI for Rental Property in 2022? "

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How to Calculate Return on Investment (ROI)

Arlene Soto

1 min. read

Updated October 25, 2023

Return on investment (ROI) is a financial concept that measures the profitability of an investment.  There are several methods to determine ROI, but the most common is to divide net profit by total assets.  For instance, if your net profit is $50,000, and your total assets are $200,000, your ROI would be 25 percent. A common definition of ROI is “a profitability measure that evaluates the performance of a business by dividing net profit by net worth.”

In a small business, the uses of ROI could be to measure the performance of pricing policies, an investment in capital equipment, or an inventory investment.  When purchasing assets in a business, such as inventory or equipment, you expect to get a financial benefit from the purchase.  Return on investment is a tool to help decide between purchase alternatives that will either generate revenue or result in cost savings that benefit the net income of the business.  Investors will also look at return on investment when choosing whether to fund a business venture.

Return on investment may also be measured unconventionally, such as in terms of social responsibility or environmental and societal benefits.  This is more difficult to measure—in determining the social return on investment, the payback would need to be quantified to calculate the cost versus the benefit.  A  network of practitioners  was formed in 2006 to facilitate the evolution of calculating social return on investment.

While return on investment is a useful tool to look at profitability, calculations are complicated by other factors such as time, maintenance costs, financing costs, other investment considerations, and the overall goals of the company.  For instance, with the purchase of capital equipment, it is expected that equipment will provide a benefit to the company for several years. As such, the net income will need to be estimated for future time periods to determine the overall ROI.  Additionally, maintenance costs over the life of the equipment will reduce the overall ROI.  An accountant can assist with the formulas to determine more complex ROI calculations.

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Arlene Soto is the director of the Small Business Development Center at Tillamook Bay Community College. She is the former director the Southwestern Oregon Community College Small Business Development Center Director. She is responsible for outreach to Coos, Curry and Western Douglas Counties in Oregon to provide small business development services through free, confidential business advising and low-cost training programs. Arlene has been working with businesses in the accounting field since 1976 and in management since 1988. She is a Certified Management Accountant and a NASBITE Certified Global Business Professional with a Master’s degree in Management from Marylhurst University and a Bachelor’s degree in accounting from Portland State University.

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What Is ROI (Return on Investment)?

Here's everything you should know about return on investment and how to use it to ensure your business spending is increasing your earnings.

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In business, few concepts are as important as return on investment (ROI). The adage that “you have to spend money to make money” is often true, but only if you’ve anticipated the ROI potential of your investments. Whether you’re implementing new business software or aggressively investing in a marketing campaign, the ultimate goal is to make more money. Understanding how to calculate ROI can help you understand which investments are paying off and which costs should simply be cut.

What is ROI?

Return on investment refers to the amount of profit directly related to an expense or group of expenses. Companies generally use ROI to measure the success of a specific project or purchase. If a business owner were to invest money in an advertising campaign, they’d analyze the sales generated by the ad and use that information to determine the ROI. If the money generated exceeded the amount spent, the profit would be referred to as the ROI of the ad campaign.

Investors also want to know the potential ROI of an investment before committing any funds to a company. Forecasting a company’s potential ROI is a key factor for investors who, after all, ultimately want to profit from their investment.

What is annualized ROI?

Annualized ROI describes the average yearly return on an investment over a period of years. This shows how profitable the venture is overall. Annualized ROI can help you analyze and compare the performance of your investment during specific time periods. 

Why is ROI important in business?

Only smart businesses that spend wisely and monitor ROI closely survive in the long run. Some reasons why ROI is so important include:

• Budgeting insight: Calculating ROI can give you a clearer insight into what parts of your business aren’t performing well. This way, you can make more informed decisions on where you should focus your budget . 
• Better hiring decisions: Tracking the ROI on your labor spending can help narrow your criteria when hiring new employees. With insight into your team members, you’ll be able to find the ones that work best for your business. 
• Long-term business planning: ROI can help you understand where your business shines and where you can improve it. With detailed analytics, you can plan for business growth more effectively and have more confidence in your decision. 
• Meeting customer expectations: Keeping track of ROI can also help you meet your customers’ needs. When those needs start to shift, your ROI might decrease. Tracking it means you’ll have enough time to pivot your business strategy . 

If you don’t see an optimal ROI on a certain endeavor, stop throwing money at it — you’re better off scrapping it. Continuing to spend on lost causes is a surefire way to run out of money and run your business into the ground.

What is considered a ‘good’ ROI?

What’s considered a good ROI depends on the investment. When a company is spending money on a piece of equipment, for example, the ROI is in productivity. Meanwhile, marketing spending requires an ROI in sales. The ROI you expect from your search engine optimization efforts will be different from the ROI you look for from an investment in a new factory.

A healthy double-digit ROI is great for starters, and if you identify high-percentage ROIs, you should aim to figure out how to amplify and extend those effects. Consider carefully whether you get an ROI at all and be realistic before signing contracts and spending money. Don’t make any big purchases right away — someone promising the moon is likely not going to deliver good returns.

Limitations of ROI

You can gain a lot of financial foresight by calculating your ROI but measuring your business’s success based on an ROI has its limitations.

Here are three limitations to consider.

• Your company’s cash flow is not directly reflected in your ROI, so your business’s financial health may not always be measured accurately using ROI alone: “For example, the ROI may be 5%, but it may be losing cash flow and be a very costly investment,” said Robert Gauvreau, certified public accountant and chief executive officer (CEO) of accounting firm Gauvreau. “Whereas another investment that is generating 4% ROI may be generating a positive cash return to the investors.” Depending solely on ROI to evaluate the financial health of a project only gives you a partial understanding of what’s affecting your finances.
• To calculate an accurate ROI, you need a firm grasp of your future business expenses: If you don’t yet have accurate numbers for future expenses, or if the numbers comprising your calculation are variable, such as interest rates that may change, the ROI may be inaccurate. 
• ROI only measures the financial success of a project: For example, investing in new computers and tech for your employees may have a negative ROI, but it may make your employees happier and increase retention. The ROI of a project or venture doesn’t account for the nonfinancial benefits of an investment.

Benefits of calculating ROI

Understanding your profits and the impact of an investment on your business is important and extremely helpful when making decisions for your company.

Here are two more benefits that calculating your return on investment provides:

• Calculating ROI allows business owners to track and analyze short- and long-term projects: “You can set simple targets for both short-term and long-term goals, and ROI can measure if you are achieving those benchmarks quickly and easily,” Gauvreau said. 
• Determining ROI helps you evaluate your business’s financial performance: Knowing your ROI keeps your company on track by demonstrating whether your business is profiting above or below its average, said Leonard Ang, real estate agent and CEO of iProperty Management. It’s a good reminder for companies to maintain a standard for their finances.
• ROI is one of the simplest performance metrics to calculate: All ROI does is measure the cost of an investment vs. the revenue that investment yields. It’s a universally accepted financial metric because it’s easy for anyone to understand and translates directly to how much money you’ve made from a given expense. 
• Knowing ROI can help you better understand the impact each department is having on your profits: Since ROI is so simple to calculate, it’s one of the easiest ways to compare the performance of departments within your company. Comparing a department’s ROI this year to its past ROI can help you understand how efficiently it’s performing. 

ROI formula

To calculate ROI is to take the gains of an investment, subtract the cost of the investment and divide the result by the cost of the investment:

ROI = (gains – costs) / costs

For example, let’s say you make a major purchase, like buying a home.

“You purchase your home for $1 million,” Gauvreau said. “After living in your home for three years, you sell it for $1,120,000. The result, after three years, your home increased in value by $120,000.”

If we follow the ROI = (gains – costs) / costs formula, we find that the return on investment is 12%.

($1,120,000 – $1,000,000) / $1,000,000 = 0.12

Another example of ROI would be investing in the stock market, Gauvreau said. If you invest $100,000 in shares of a company, and 12 months later it grows to $160,000, your ROI would be 60% because: 

($160,000 – $100,000) / $100,000) = 0.6

Use return on investment for more effective growth

Understanding the ROI of any project or marketing campaign helps in identifying successful business practices. Many companies use ROI to identify methods of marketing and advertising that yield the highest return based on previous successes. This way, ROI becomes not only a measure of past success but also an estimate for the coming months.

ROI can be applied to most areas of your business and works as a simple but effective method to measure your performance. Using it in combination with non-numerical data, such as employee happiness, can give you some ideas about how to grow your business. With proper ROI use, you can make the most of your resources for long-term success.

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Calculating the return on investment for your business

It's impossible for your business to flourish if you don't invest in its growth. However, it can be hard to determine whether investments will be worth it in the long run. For business owners looking to make smarter financial decisions, this guide outlines everything you need to know about calculating your return on investment (ROI). We cover the difference between a standard and an annualised return rate, run you through the calculations step by step, show you how to interpret the results before addressing the formulas various pros and cons. We conclude by mentioning Kriya's offerings and answering some frequently asked questions.

Whether you're looking to hire new staff or move to bigger premises, if you're a small business on the rise, it's likely you're making a lot of investments. As critical as these expenditures can be, sometimes it's hard to know if you're getting your money's worth. This is where the return on investment, or ROI, comes in.

ROI is one of the best metrics for monitoring your businesses performance. Since its inception in 1914, the formula has helped business owners all around the globe make smarter financial decisions. Specifically, it’s helped individuals and companies take the guesswork out of financing by measuring their return on a potential investment.

Despite its clear benefits, however, many entrepreneurs are yet to familiarise themselves with the formula. Therefore, to clear up any potential confusion, this guide covers everything you need to know about calculating your return on investments. Specifically, we show you how to calculate your basic and annualised ROI and how to interpret the results before outlining the various pros and cons associated with its use.

Before we address its uses, however, what exactly do we mean when we talk about ROI?

WHAT IS A RETURN ON INVESTMENT (ROI)?

In simple terms, ROI is a financial metric that measures the return on an investment relative to its cost. It helps companies and individuals to compare the efficiency of different investments, so they're able to understand if the rewards will outweigh the risks.

Generally speaking, the lower the cost of investment and the higher the net profit, the more positive the ROI. Subsequently, the higher the percentage, the more favourable an investment is likely to be.

The metric is used widely because it’s relatively easy to calculate and can be applied to any type of business or personal investment. It’s specifically popular in the field of marketing because it helps leaders work out if their marketing campaigns are worth investing in.

WHAT’S THE BASIC FORMULA?

The formula for calculating your basic ROI is as follows:

• ROI = 100% * net profit / cost of investment

HOW TO CALCULATE YOUR RETURN ON INVESTMENT (ROI)

Working out your ROI is a relatively straightforward process, especially for small businesses. This means you should be able to analyse your investments in-house without the help of external financial advisors. Depending on the end goal of your calculation, a return on investment can be measured in a number of different ways. However, the formula we've listed above is the most commonly used ratio.

To work out the ROI of a particular expenditure, you can follow the following steps.

1. Determine your net profit from the investment

The net profit represents the total amount of money gained from your investment. In other words, it’s the benefit you and your business will receive if you go through with the -. To work out this figure, you simply deduct the total expenses of the investment from the total revenue.

2. Calculate the cost of investment

Once you’ve established your net profit, it’s time to work out the cost of your investment. To calculate this figure, you simply add the fixed cost of your expenditure to its variable costs. This will provide you with your total cost of investment.

3. Divide the net profit by the cost of investment

In line with the ROI formula, next, you need to divide your net profit figure by the total cost of your investment.

4. Multiply this figure by 100%

Finally, you multiply this decimal number by 100, and you will have your final ROI ratio in the form of a percentage.

WHAT’S AN ANNUALISED RETURN ON INVESTMENT (ROI)?

While the basic ROI formula is the most effective way to measure your immediate returns, it doesn't consider the holding period of the investment. Therefore, if you're looking to analyse your returns over a specific length of time, it may be more appropriate to work out your annualised return.

As the name suggests, an annualised ROI represents the average of an investment's earnings over a year. It's expressed as a time-weighted annual percentage, and types of returns can include capital, interest payments and dividends. The calculation also includes adjustments for compounding interest, so many experts believe it is more accurate than the basic formula.

WHAT IS THE ANNUALISED RATE OF RETURN FORMULA?

The annualised rate of return formula is as follows:

• The annualised rate of return = ( ending value of investment/beginning value of investment) x 100

How to calculate your annualised return

To work out your annualised ROI, you follow the steps below.

1. Determine your beginning value

Your beginning value represents how much your investment portfolio was worth before the capital changed hands. In simpler terms, it’s how much money you put into an investment.

2. Calculate your ending value

Once you’ve established your beginning value, it’s time to work out your ending value. Your ending value is how much you stand to gain from the investment over the period of your annualised return. As stated above, aside from the basic amount of capital, this figure should also include interest payments and dividends.

3. Work out your annualised return

Once you have both of these figures at hand, you can calculate your final annualised return. To do so, you need to divide your ending value by your beginning value before multiplying this number by 100. This will provide you with your final annualised ROI ratio.

HOW TO INTERPRET YOUR ROI

There isn’t much point in calculating your investments basic or annualised ROI if you can’t make sense of the end result. Luckily, interpreting your return is pretty simple: the higher your basic or annualised ROI is, the more fruitful your investment is likely to be.

Since the nature of each investment differs so heavily, there is no benchmark of what a ‘good’ or ‘bad’ ROI ratio is. There are, however, other ways you can interpret your results. By researching other small businesses in your industry and recording the average ROI on their investments, you can gauge what a standard return may look like for a company similar to yours.

You can then compare your results against this figure to establish your business’s performance. You should, however, understand that this comparison will only give you a rough indication of your ROI’s value.

WHY ARE THESE FORMULAS SO IMPORTANT?

By now, you should understand the basics of the standard and annualised ROI formulas. If you are new to the world of profitability ratios, below we explain why they are such a valuable tool for businesses.

They help you to determine profitability

When people invest, they are looking to get more out than they put in. However, due to a whole host of variables, business owners can’t guarantee that this risk will pay off. By calculating the ROI of an investment before they split with their cash, they can calculate its rough profitability. This lowers their chance of encountering negative returns.

They help you to understand risks

Every financial investment involves some degree of risk, and it’s the role of business owners to manage these risks as much as possible. Fortunately, by using the ROI metric, you’re able to avoid risky investments and make the smartest decisions possible for the future of your business.

They are simple to use

Finally, another reason ROI formulas are beneficial is because they're so easy to use. If you're calculating your basic or annual returns, all you need are two key figures. Compared to other financial metrics; these formulas are extremely straightforward. Therefore, it's unsurprising that they're such a staple for business owners trying to manage their finances.

WHAT ARE THEIR LIMITATIONS?

Despite the clear advantages of these formulas, however, they’re far from perfect. To give you a more balanced view of the metrics, here are some limitations to their use.

They aren’t 100% accurate

Return formulas aren’t able to provide accurate financial projections because the formula is based on too many variables. They instead give companies and individuals a rough estimate of their profitability. With this in mind, to avoid getting caught out, business owners shouldn’t base crucial business decisions on these results.

The basic formula doesn’t account for time

As we’ve already addressed, the standard ROI formula only considers the immediate outcome of an investment. This makes it hard to predict how an investment will pay off later down the line. Fortunately, if you’re looking to understand your investments return over a 12 month period, you can use the annualised ROI formula.

Results can be inconsistent

While the standard ROI metric is the most popular way to calculate returns, many other formulas exist. And since every formula generates slightly different results, it’s impossible to obtain an objective measure of your ROI. Because of this, investors should always stick to the basic formula when possible and check which formula was used when comparing the results of other companies.

INVEST IN YOUR BUSINESS WITH FLEXIBLE FINANCING

No matter how long you’ve been in the game, investments are always a bit of a gamble. However, by using these tools above, you can invest in your business’s future in the safest and most secure way possible. If you’re currently lacking the capital needed to make valuable investments, Kriya may have a solution for you.

From recovery loans to embedded financing, Kriya offers a wide range of funding options to business owners up and down the UK. We truly believe that small businesses are the future and that cash flow barriers shouldn’t prevent them from reaching their potential. If you’re serious about investing in your businesses long term growth, you can learn more about what we do here .

FREQUENTLY ASKED QUESTIONS (FAQS)

What is a return on investment (ROI)?

ROI is a financial metric that measures the return on an investment relative to its cost. It helps companies and individuals to compare the efficiency of different investments, so they're able to understand if the rewards will outweigh the risks. Generally speaking, the lower the cost of investment and the higher the net profit, the more positive the ROI.

How do you calculate your return on a business investment?

The basic ROI formula is ‘ROI = 100% * net profit/cost of investment'. In accordance with this formula, to calculate the ROI, you need to determine your investment's net profit and its total cost. Then, you divide the net profit by the total cost and multiply this result by 100. The figure you are left with is your final ROI ratio.

What is an annualised rate of return?

An annualised ROI represents the average of an investment's earnings over a year. It's expressed as a time-weighted annual percentage, and types of returns can include capital, interest payments and dividends. The calculation also includes adjustments for compounding interest, so many experts believe it is more accurate than the basic formula.

How does a business analyse its ROI ratio?

Since the nature of each investment differs so heavily, there is no benchmark of what a ‘good’ or ‘bad’ ROI ratio is. There are, however, other ways you can interpret your results. By researching other small businesses in your industry and recording the average ROI on their investments, you can gauge what a standard return may look like for a company similar to yours. You can then compare your results against this figure to establish your business’s performance.

What are the benefits of the return on investment (ROI) metric?

Return on investment (ROI) formulas are an indispensable tool to businesspeople all around the globe. This is because they are a reliable way to measure the profitability of an investment, they help to keep financial risks to a minimum, and they are simple and easy to use.

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Return on Investment (ROI)

By Entrepreneur Staff

Return on Investment (ROI) Definition:

A profitability measure that evaluates the performance of a business by dividing net profit by net worth

Return on investment, or ROI, is the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets. So if your net profit is $100,000 and your total assets are $300,000, your ROI would be .33 or 33 percent.

Return on investment isn't necessarily the same as profit. ROI deals with the money you invest in the company and the return you realize on that money based on the net profit of the business. Profit, on the other hand, measures the performance of the business. Don't confuse ROI with the return on the owner's equity. This is an entirely different item as well. Only in sole proprietorships does equity equal the total investment or assets of the business.

You can use ROI in several different ways to gauge the profitability of your business. For instance, you can measure the performance of your pricing policies, inventory investment, capital equipment investment, and so forth. Some other ways to use ROI within your company are by:

• Dividing net income, interest, and taxes by total liabilities to measure rate of earnings of total capital employed.
• Dividing net income and income taxes by proprietary equity and fixed liabilities to produce a rate of earnings on invested capital.
• Dividing net income by total capital plus reserves to calculate the rate of earnings on proprietary equity and stock equity.

More from Operations

Capital equipment.

Equipment that you use to manufacture a product, provide a service or use to sell, store and deliver merchandise. This equipment has an extended life so that it is properly regarded as a fixed asset.

Fulfillment

The process of receiving, packaging and shipping orders for goods

The process of bringing goods from one country for the purpose of reselling them in another country

Depreciation

An expense item set up to express the diminishing life expectancy and value of any equipment (including vehicles). Depreciation is set up over a fixed period of time based on current tax regulation. Items fully depreciated are no longer carried as assets on the company books.

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How to Calculate ROI to Justify a Project

• 12 May 2020

Understanding how to calculate the potential return on investment (ROI) of a project is an essential financial skill for all professionals to develop.

If you’re an employee, knowing how to calculate ROI can help you make the case for a project you’re interested in pursuing and have taken the lead on proposing. If you’re a manager, understanding ROI can give you greater insight into your team's performance . If you’re an executive, working knowledge of ROI can make it easier for you to identify which projects should be greenlit and which should be passed over. Once ROI is proven, it may be possible to replicate success by applying lessons learned from the first project to other segments of the business.

If you’re unfamiliar with accounting and finance , the prospect of determining the ROI of a project may seem beyond your abilities. However, it’s not an overly complicated process. By understanding the basics of financial valuation, which can enable you to put a monetary value on companies, projects, or anything that produces cash flows, anyone can learn to calculate the ROI of a project.

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What Is Return on Investment?

Return on investment (ROI) is a metric used to denote how much profit has been generated from an investment that’s been made. In the case of a business, return on investment comes in two primary forms, depending on when it’s calculated: anticipated ROI and actual ROI.

Anticipated vs. Actual ROI

Anticipated ROI , or expected ROI, is calculated before a project kicks off, and is often used to determine if that project makes sense to pursue. Anticipated ROI uses estimated costs, revenues, and other assumptions to determine how much profit a project is likely to generate.

Often, this figure will be run under a number of different scenarios to determine the range of possible outcomes. These numbers are then used to understand risk and, ultimately, decide whether an initiative should move forward.

Actual ROI is the true return on investment generated from a project. This number is typically calculated after a project has concluded, and uses final costs and revenues to determine how much profit a project produced compared to what was estimated.

Positive vs. Negative ROI

When a project yields a positive return on investment , it can be considered profitable, because it yielded more in revenue than it cost to pursue. If, on the other hand, the project yields a negative return on investment , it means the project cost more to pursue than it generated in revenue. If the project breaks even, then it means the total revenue generated by the project matched the expenses.

Return on Investment Formula

Return on investment is typically calculated by taking the actual or estimated income from a project and subtracting the actual or estimated costs. That number is the total profit that a project has generated, or is expected to generate. That number is then divided by the costs.

The formula for ROI is typically written as:

ROI = (Net Profit / Cost of Investment) x 100

In project management, the formula is written similarly, but with slightly different terms:

ROI = [(Financial Value - Project Cost) / Project Cost] x 100

Check out our video on return on investment below, and subscribe to our YouTube channel for more explainer content!

Calculating the ROI of a Project: An Example

Imagine that you have the opportunity to purchase 1,000 bars of chocolate for $2 apiece. You would then sell the chocolate to a grocery store for $3 per piece. In addition to the cost of purchasing the chocolate, you need to pay $100 in transportation costs.

To decide whether this would be profitable, you would first tally your total expenses and your total expected revenues.

Expected Revenues = 1,000 x $3 = $3,000

Total Expenses = (1,000 x $2) + $100 = $2,100

You would then subtract the expenses from your expected revenue to determine the net profit.

Net Profit = $3,000 - $2,100 = $900

To calculate the expected return on investment, you would divide the net profit by the cost of the investment, and multiply that number by 100.

ROI = ($900 / $2,100) x 100 = 42.9%

By running this calculation, you can see the project will yield a positive return on investment, so long as factors remain as predicted. Therefore, it’s a sound financial decision. If the endeavor yielded a negative ROI, or an ROI that was so low it didn’t justify the amount of work involved, you would know to avoid it moving forward.

It’s important to note that this example calculates an anticipated ROI for your project. If any of the factors affecting expenses or revenue were to change during implementation, your actual ROI could be different.

For example, imagine that you have already purchased your chocolate bars for the agreed-upon $2 apiece and paid $100 to transport them. If the most that the store will pay you is $2.25 per chocolate bar, then your actual revenues drop substantially compared to your projected revenues. The result is a reduced net profit and a reduced actual ROI.

Actual Revenues = 1,000 x $2.25 = $2,250

Net Profit = $2,250 - $2,100 = $150

ROI = ($150 / $2,100) x 100 = 7.14%

Circumstances are rarely as straightforward as this example. There are typically additional costs that should be accounted for, such as overhead and taxes. In addition, there’s always the possibility that an anticipated ROI will not be met due to unforeseen circumstances, but the same general principles hold true.

How to Use Finance to Pitch Your Project

Have you ever pitched a project to senior management, only to have the idea shot down under the guise of “not making financial sense?" It happens more often than you might think. By learning how to calculate ROI for projects you’re interested in pursuing, you can self-evaluate them before they're raised up to decision-makers within your organization and defend them as they’re being considered.

Similarly, by understanding how to calculate ROI after a project you’ve spearhead is done, you can better speak to the contributions that you and your team have made toward shared company goals.

High-performing businesses are successful because they make smart decisions about when and where they allocate available resources. Calculating the ROI of a project before it moves forward can help ensure that you’re making the best possible use of the resources you have available.

To learn more ways that you can use financial concepts to improve your efficacy and advance your career, explore our online finance and accounting courses . Download your free flowchart to determine which is right for you.

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ROI Calculator - Return on Investment

What is roi, roi formula, examples of roi calculation, return on investment calculator, roi and financial decisions, roe vs. roi, advantages and disadvantages of roi, investing recommendations for better roi, additional information and further calculators.

ROI calculator is a kind of investment calculator that enables you to estimate the profit or loss on your investment. Our return on investment calculator can also be used to compare the efficiency of a few investments. Thus, you will find the ROI formula helpful when you are going to make a financial decision. If you know how to calculate ROI, it's easier to foresee the results of an investment.

In the following part of the article you will find answers for the following questions:

• What is ROI formula?
• How to calculate ROI?
• What is a difference between ROE vs. ROI?
• How can you use ROI in making wise financial decisions?
• What are the advantages and disadvantages of ROI?

And last but not least, in the text below, you will find out how to use our return on investment calculator to make your calculations (and thus financial decisions) even faster and smarter.

First of all, you need to know that ROI is an abbreviation of return on investment . By definition, ROI is a ratio between the net gain and the net cost of an investment . In other words, ROI compares the net income from an investment to the net expenses required to finance that investment. Customarily, ROI is presented in the form of percentage points . Thus, when a calculation returns a result of ROI = 0.1 , the financial analysts report it as ROI = 10% .

Alongside other simple measures of profitability (NPV, IRR, payback period), ROI is one of the most frequently used methods of evaluating the economic consequences of an investment. Undoubtedly, its main advantage is its simplicity – ROI can be easily applied to measure investment profitability, as it is based on easily available data, and its value is clear to understand and interpret. Moreover, as ROI is calculated as a percentage, it's easy to compare the results of many different investments. Consequently, you are able to choose the most beneficial one, all thanks to ROI.

Before we move on and discuss ROI in greater detail, it is worth mentioning that in finance, several different measures may be called return on investment. For example, you can say ROI when referring to Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity, or Earnings per Share. However, the best known and probably the most commonly used measure is known as simple return of investment , henceforth referred to as return on investment (ROI).

By the way, it is worth mentioning that due to the terminology confusion, when you use the ROI measure in real-life decisions, it is a good idea to know precisely how it has been computed. We also believe that this is one more reason to read our article carefully from top to bottom.

Investors can't estimate the efficiency of their investments without understanding how to calculate ROI. That's why the ROI formula plays a crucial role in investment decisions.

The ROI formula is based on two pieces of information - the gain from investment and the cost of investment. The equation that allows calculating ROI is as follows:

ROI = ( G – C ) / C

• G - gain from investment
• C - cost of investment

Note here that the ROI equation doesn't take into consideration any risks associated with the investment. It is one of the biggest limitations of ROI (for more, see the section advantages and disadvantages of ROI ).

Do you want to understand the ROI equation? Are you curious about how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of an ROI calculation?

We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.

As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000.

To calculate return on investment, you should use the ROI formula:

ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%

So the return on your investment for the property is 50%.

As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years. First of all, note that your total gain from this investment is the gain from the first year plus the gain from the second year.

So: G = $200,000 + $200,000 = $400,000 .

Then, you can use the ROI formula:

ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%

The ROI of the marketing program is 60%.

You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. The total value of the transaction was then: 150 x $12.67 = $1,900.50 . After nine months, thanks to the favorable economic conditions, the stock price rose to $15.23, and you decided to sell them (the value of the transaction was: $15.23 × 150 = $2,284.50.

The ROI of this investment is:

ROI = ($2,284.50 – $1,900.50) / ($1,900.50) × 100%= ($384) / ($1,900.50) × 100% = 0.2021 × 100% = 20.21%

A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, let's see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:

ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%

This time, the outcome of your investment is far from profitable.

The numbers given in the examples in the previous paragraph are rather simple, the number used in real business investments tend to be a bit more complicated. If we deal with much larger amounts of money or with more complex numbers, it's far more comfortable to use our return on investment calculator. Although the ROI calculator bases its calculation on the same formula, the usage of it is much faster and easier. With our tool, it's enough only to type the invested amount and the returned amount to get your estimated ROI.

Return on investment calculator is a tool for everyone who has got a business or is planning to set one up. This is also highly recommended for any investors, from shopkeepers to stockbrokers.

Are you curious how to use our return on investment calculator? Obtaining the value of ROI with our smart return on investment calculator is easier than you thought. To assess the profitability of your investment within a few seconds, you don't need to memorize the ROI formula or perform any computations, all you need to do is to fill the appropriate fields in our calculator:

• invested amount – the amount of money you are going to invest (or you have already invested)
• returned amount – the total amount of money you are planning to receive (or you have already received) after the closing of the investment.

That's it! In an instant, our return on investment calculator makes all necessary computations and gives the results. They are shown in a field ROI where you could see the value of ROI as a percentage. Did you know that you can also use the return on investment calculator the other way round? Plug in the initial principal ( invested amount ) and the percentage of estimated profit ( ROI ) to find out what amount of money you can expect to earn.

In conclusion, our ROI calculator can help you make the most beneficial financial decision for you, completing many different cost-benefit analysis's in no time. Moreover, with the mobile version of our return on investment calculator you are able to compute ROI whenever and wherever you want.

Return on investment is a useful measure to estimate the surplus of net investment benefit on an accrual basis. ROI can also be used in making rational financial decisions. As a simple method, ROI is used primarily as an auxiliary at the initial stage of assessment of the investment project.

In general, the decision criterion is defined in the following way:

• ROI ≥ LV – investment is profitable
• ROI < LV – investment is unprofitable

Where LV is a predefined limit value.

In the simplest case (investor has a capital to invest and has only one investment alternative), the decision criterion is formulated as follows:

• ROI ≥ 0 – investment is profitable
• ROI < 0 – investment is unprofitable

In real life investments, a limit value for ROI analysis may be set on a particular level which is different than zero. For example, you can set a return on investment in your branch of industry (ROIb) as a limit value. Then the absolute decision criterion is:

• ROI ≥ ROIb – investment is profitable (acceptable)
• ROI < ROIb – investment is unprofitable (not acceptable)

In a professional application, financial analysts and decision-makers usually use weighted average cost of capital (WACC) as a limit value. In this case, the decision criterion is:

• ROI ≥ WACC – investment is profitable (acceptable)
• ROI < WACC – investment is unprofitable (not acceptable)

As return on investment (ROI) is sometimes confused with return on equity (ROE), it is worth briefly discussing the similarities and differences between them.

Firstly, both ROI and ROE are simple methods of an absolute evaluation of investment profitability. The characteristic feature of ROI and ROE is that they are single-periods methods, and they do not have the same value for the entire duration of the investment. Moreover, both of these indicators do not include any risk measure. In addition, neither ROI nor ROE takes TVM (which you can read more about in our time value of money calculator ) into account.

The main difference between ROI and ROE is that the former takes into account the total expenditure on investments (this is own capital and debt), whereas the formula of the latter includes only own capital.

The main advantages of ROI are as follows:

• Obtaining the value of ROI does not require complicated calculations (especially with our ROI calculator). On the contrary, it is simple and easy.
• The results of calculations are easy to interpret and compare with other investments.
• The data necessary to perform calculations is easy to obtain. In fact, you only require two figures to obtain the ROI - gain from investment and cost of investment.

On the other hand, the most notable limitations of ROI are:

The ROI formula does not take into consideration the changes in the value of money over time (formally, we say that the ROI disregards the factor of time). This leads to the conclusion that a higher value of ROI does not always mean the investment option is better than another.

Let's consider two alternative investments with the same ROI of 20%. Investment A last one year, and investment B – four years. You will get the profit from investment A within one year. You need three additional years to get the same gain from investment B. Undoubtedly, despite the same values of ROI, investment A is better than B.

To conclude: If you want to compare two investment options with ROI, you must make sure that ROI calculations are performed over the same time period.

The determination of the LV (limit value) is not objective and thus may bias the result of analysis and lead to improper decisions.

Return on investment may be susceptible to manipulation. It is because you can use different approaches to measure gain from investment and cost of investment.

Results obtained from ROI calculations are valid and comparable only if the considered gains and costs are related to the undertaken investment, and are not effects of other causes.

In the stock market if you are sure of your investment, you can try to reduce your average cost per share. Then, any posterior return to the investment will be higher because it would be compared to a smaller investment cost.

In the stock market, look for companies with high Earnings per share growth. Specifically, you should look for companies that are reporting over 10% EPS CAGR, those ones are the most likely to give you high ROI if they sustain such earnings growth.

In the stock market, you also have to consider your company operating efficiency. One way of doing that is to measure the EBITDA margin. Remember you should look for EBITDA margin positive and growing. That indicates a company that is doing better and better over time and might give you a considerable ROI in the near future.

Consider tracking your portfolio beta from time to time. The beta of your portfolio indicates how much extra/less risk you have compared to the broad market. Is the risk you can diversify through diversification. For higher ROIs, a higher portfolio beta is recommended. However, you should also be prepared for larger drawdowns.

Another great source of extra income for boosting your ROI is to consider stock options. There are two types of options: calls and puts. With each of them you can make more money in case the market keeps increasing or crash. If you are more into limited risk but still want the extra profit, check out the bull call spread strategy.

Return on investment is a very popular measure because of its simplicity and usefulness. Now that you know how to calculate ROI, it's high time you found other applications which will help you make the right choices when investing your money. We are sure that the ROI equation is not the only thing you should be familiar with to make smart financial decisions.

• If you are trying to decide what ROI you will get when investing time and money into building a software tool, check out the build vs. buy calculator .
• If you want to estimate the average yearly gain from your investment, you should use the CAGR calculator .
• If you are involved in a trade, you may also need the profit margin calculator , which lets you calculate every variable in the sales process.

How to calculate the ROI percentage?

To calculate the ROI percentage, follow the given instructions:

Find out the initial and final value of the investment.

Subtract the initial value of the investment from the final value .

Divide the result from Step 2 by the initial value of the investment and multiply the result by 100 .

Congrats! You have calculated the ROI percentage.

How to calculate the ROI on real estate investment?

To calculate the ROI on a real estate investment, proceed as follows:

Subtract the property's purchase price from its selling price .

Divide the result from Step 1 by the purchase price .

Multiply the result by 100 to get the ROI on real estate investment.

If the net gain on an investment is $1200 and the investment cost is $2000, what is the ROI?

0.6 or 60% . The formula for calculating ROI is ROI = Net gain / Cost of investment . Using the values $1200 and $2000 in the formula we will get: ROI = $1200 / $2000 = 0.6 or 60%.

What does 30% ROI mean?

An ROI (return on investment) of 30% means that the profit or gain from an investment is 30% . For example, if the investment cost is $100, the return from investment is $130 - a profit of $30.

Amortization

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How to Calculate Your Return on Investment

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You invested in property a few years ago, and now you want to know: Was that investment worth it? To find out, you need to calculate your return on investment (ROI). We walk you through how to use the ROI formula and also where you can go for easy calculations.

The return on investment formula

To calculate your ROI, divide the net profit from your investment by the investment's initial cost , then multiply the total by 100 to get a percentage:

ROI = (net profit / investment cost) x 100

To calculate your net profit, subtract your stock's current value from the initial investment price.

Let's say you bought $5,000 worth of stock in a company. In three years, you sell it for $7,000. First, find your net profit: $7,000 – $5,000, so $2,000. Then divide your net profit by the initial investment cost of $5,000, multiplying by 100 to calculate the investment ratio:

ROI = ($2,000 / $5,000) x 100

In this case, you've earned a 40% return on investment—not bad.

The higher the percentage, the better your return on investment. A negative percentage, though, means you actively lost money on this investment.

Annualized return on investment

The ROI formula doesn't account for the amount of time you have a stake in an investment, otherwise known as the holding period. That also means the ROI formula doesn't account for compound interest , or the interest you accrue each year that contributes to the next year's interest . (Another way to think of compound interest is the interest you earn on interest .)

If you want to know how much you're earning year over year, accounting for compound interest, use the annualized return on investment formula:

Annualized ROI = [(1 + ROI) 1/n – 1] x 100

In this formula, n means the number of years you're holding the investment, or the holding period.

Let's go back to our example above, where you determined that your ROI after three years is 40%, or, numerically speaking, 0.4. If you're calculating the annualized ROI, your formula should look like this:

Annualized ROI = [(1 + 0.4) 1/3 – 1] x 100

Following this formula, your annualized ROI is about 11.87%.

Additional ROI calculations

A company's cash flow fluctuates from year to year, and so does your stock's value—which means you likely aren't going to earn the exact same ROI every single year. If you want a more detailed understanding of your ROI, then calculating your ROI and annualized ROI aren't enough. Instead, you need to make a few more calculations:

• The compound annual growth rate (CAGR), or annualized total return, measures your investment's potential growth rate year over year, assuming an average rate of growth and a reinvestment of funds at the end of each term.
• The internal rate of return (IRR) is a much more complicated equation that accounts for more detailed cash inflows (and, alas, outflows) over the course of an investment.

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Tools for calculating your ROI

You can calculate your ROI by hand, but why bother? Online ROI calculators can simplify the process—just input the numbers and the calculator will crunch them for you. Alternatively, run the numbers through spreadsheet software like Excel or Google Sheets. Some investing sites offer free Excel templates to make calculating ROI (and more complicated financial metrics like IRR) a little simpler.

The takeaway

The return on investment equation doesn't tell you how much you're guaranteed to make on a given investment—no equation can tell you that for certain, since the lack of certainty is a key part of the game. Still, it's a useful calculation to have under your belt whether you're investing in stock for the first time or trying to determine if your next investment property will be worth what you paid for it.

Want more financial metrics for evaluating an investment? Check out our piece on another key financial ratio: the future value formula .

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ROI Templates and Calculators For Many Disciplines

By Andy Marker | October 11, 2018

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In this guide, you will learn about the role of ROI, its formula, why you would use it, the four methods to easily calculate it, and additional methods to break down work. Download the essential Excel templates to perform a variety of ROI tasks, including content marketing metrics, website ROI analysis, healthcare quality initiative ROI, event ROI calculator, PLM ROI calculator, IT ROI, cost avoidance calculator, and TCO ROI.

Cash Flow ROI and Template

Cash Flow ROI (CFROI) is a proxy for a company’s economic return. This return is compared to the interest rate charged to commercial banks from the Federal Reserve’s standard (the discount rate), to see if there is value-added potential. CFROI is the average economic return in a year on all of a company’s investments. Enter your variables in this template to determine your company’s CFROI.

‌ Download Cash Flow ROI and Template - Excel

In this template, you will enter the following variables:

Cost Fixed Assets : These are assets not expected to be used up or converted into cash within a year. They can include property, plant, and equipment (PPE), and may be used to generate income.

Cost Non-cash Working Capital : The sum of inventory and receivables

Cost Capitalized Operating Leases : Posted as an asset on the balance sheet, this type of lease expenses the lease payments.

Cost Accumulated Depreciation on Assets : An asset account with a credit balance.

Years Average Life of Assets : The accumulated depreciation divided by the current depreciation expense.

Percent Inflation Rate During Asset Life (Annual) : The change in purchasing power.

Years Remaining Life of Assets : This is calculated based on when the asset went into service and the preferred depreciation method.

Percent Salvage Value at End of Life : The resale value at the end of the asset’s useful life.

Cost Current Earnings Before Interest and Taxes (EBIT) : All incomes and expenses, except interest and income tax expenses.

Cost Current Depreciation : The deduction that helps spread the cost over many years.

Percent Marginal Tax Rate : The tax percent of your income based on your tax bracket.

Percent Nominal Cost of Capital : The rate of return needed to persuade your company to make a given investment.

Below are the outputs from these inputs:

Adjusted gross investment (for inflation)

Gross cash flow

Expected salvage value

Years remaining asset life

Cash flow return on investment (CFROI)

Cash flows per investment year

NPV and IRR Calculations and Template

Net present value (NPV) and internal rate of return (IRR) are metrics used to estimate ROI. NPV is the dollar difference between the present value of cash inflows and outflows over time. Companies use NPV as a tool to help them decide if an investment will provide long-term value, to compare different investment options, and to decide whether they should introduce a new product. IRR is the calculation that estimates the percent profitability of possible investments by taking the NPV equal to zero.

NPV looks at each cash flow separately, even when the discount rate is unknown. An NPV greater than zero makes a project financially worthwhile. IRR compares projects using one discount rate, predictable cash flows, equal risk, and a shorter time. IRR does not account for changes in the discount rate, which at times makes it a poor metric. Further, if there are a mix of positive and negative cash flows, IRR calculations are not effective. To calculate your company’s NPV and IRR, use this template.

‌ Download NPV and IRR Calculations and Template - Excel

In this template, you will input the following:

Discount rate

Series payment type (None, Uniform, Gradient, or Exp Grad)

Value (A, G, or Eo)

G % for Exp Grad

The number of periods

For each period, the values

Below are the outputs for this template:

The sum for each period

The different series for each period

NPV for each series

NPV for each label

IRR for each label

Cost Avoidance Calculator Template

Preparing for a conference or large event is a big commitment for a business. There are direct costs, such as airfare, registration, and accommodations, and indirect costs such as the hours of preparation. Cost avoidance includes actions or event-substitutions that reduce future costs, such as planning virtual conferences, trainings, or parts replacement before failure (and subsequent damage to other parts). Cost avoidance activities may incur higher immediate costs but save money — sometimes totaling extreme savings — over time. This is a different concept from cost savings , in which you actually save the money you plan on spending. Lower spending, investment, or debt levels is what saves money.

Use this template to calculate cost avoidance as ROI. This calculator has a variety of event scenarios, including training, conference, and an in-person event. These costs are compared to a virtual briefing, a virtual conference, and a virtual large event, respectively. With your input, you can calculate the costs per participant for each, the cost avoidance factor per participant, and the avoidance factor.

‌ Download Cost Avoidance Calculator - Excel

Marketing ROI and Content Marketing Templates

Marketing is a huge expense for any business. Whether your company invests in a comprehensive program that rolls out print and television ads as well as a social media presence, or just has a Facebook page, you should know the worth of your content over time. Sirius Decisions stated in 2013 that 60 to 70 percent of content goes unused. The cost of creation itself involves the per hour cost of each person by the number of creation hours involved, plus any actual content expenses. Having the ROI for marketing content can help motivate your staff to use it.

The marketing ROI (MROI) is simply the revenue generated from your content minus the cost to produce your content. This is a simple calculation, but some professionals caution that marketing professionals should define how and what they have measured in order to signal to stakeholders whether they are defining short-term channel-specific ROI or informing for long-term budget or strategic decisions. In this marketing ROI  template, you will find space for multiple marketing initiatives in order to compare their relative value.

‌ Download Marketing ROI Template - Excel

To use this template, input the following:

Total initiative cost

Total circulation/audience

Response rate (percent of generated leads by the audience)

Conversion rate (percent of leads which will purchase)

Average revenue per sale

Average profit per sale

From these inputs, you will get these outputs:

Total costs of all initiatives

Total cost/audience for all initiatives

Average profit per sale for all initiatives

Number of leads generated

Number of sales

Total revenue uplift

Total profit uplift

ROI percent

Cost per lead

Cost per sale

Break even response rate

Break even conversion rate

Break even profit per sale

The demand for marketing measurement and reporting is rising with marketing costs. There are many metrics that should be reported to show the success of your marketing program. Many professionals are not comfortable communicating their impact on the bottom line metrics to get the support they need. The key metrics that every marketing person should be comfortable reporting include the following:

Total Reach : The number of people your company can reach across your different networks and platforms. Each is a potential client.

Reach by Channel : The number of people following or subscribed per channel.

Total Website Visits : The number of people who visited your website in a period of time. This metric shows how well your inbound marketing is directing people to your website, which is also tracked month over month (MoM).

Website Visits by Source : This metric reports where people are coming to your website from to determine how well specific campaigns are working.

Total Leads Generated : This metric shows the interest your campaign generates for the products or services. It is one of the strongest ROI indicators.

Leads Generated by Source : This metric shows the channels that produce the most leads, which allows you to focus on the most valuable sources. 

Total Customers Driven by Marketing : This metric tracks which marketing campaigns are yielding the most customers.

Marketing Generated Customers by Source : Track the source of the customers acquired by each campaign. 

Conversion Rates

Visit to Lead Conversion Rat e: This measures the percent of people whose website visit becomes a new lead for sales.

Lead to Customer Conversion Rate : This measures the percent of people moving from leads to customers. This metric helps determine if your campaigns are generating sales-ready leads.

Visit to Customer Conversion Rat e: This is the overall funnel: whether your traffic generated turns into customers.

Content Marketing Metrics Template

Use each of the above five categories to record metrics for reporting with this template. It provides a space for each metric and ready-made graphs to add to your marketing deck so you can present your success. Fill out the reach, visits, leads, and customers templates, and your conversion rates template will automatically fill from your data.

Download Content Marketing Metrics Template

Excel  | Smartsheet

Website ROI Analyses and Template

Google Analytics 4 (GA4) can help you determine the financial value of your content so you can calculate ROI. Use GA4 to track the URLs from all your web materials, such as your website, Facebook, newsletters, and any other sources. You can track who comes to your site and the path they took to get there. For example, you can get a count of how many times someone accessed your site from a Facebook post, or how many times your content was downloaded from your site.

To set up Google Analytics 4, start by either signing in or creating an Analytics account. Set up your GA4 property, add a data stream and install your Google Analytics with Google Tag Manager. Here’s how to set up Google Analytics 4:

Create an Analytics account, unless you already have one.

Create a Google Analytics 4 Property:

Go to the Admin section of your Google Analytics 4 interface and then click Create Property .

Enter the name of your property, choose your company’s country, reporting time zone, and the main currency your business operates.

Press Next , and answer several questions. 

Then select your business objectives.

Click Create .

Configure your first Data Stream: 

In Admin , in the desired Property column, click Data Streams > Add stream . 

Click iOS app , Android app , or Web . In this article we focus on the Web stream.

For the Web , enter the URL of your website (the protocol https is already selected) and enter the name of your website.

You have the option to enable or disable Enhanced Measurement feature. By default it is enabled, but you can disable it if you want. 

Press the Create Stream button.

Install Google Analytics 4 with Google Tag Manager (GTM):

Install GTM on your site.

After that, go to GA4 > Admin > Data Streams , select your Web data stream, and copy the Measurement ID .

Go to your Google Tag Manager container > Tags > New and choose Google Analytics: GA4 Configuration .

In the Measurement ID field, enter the Measurement ID you copied in the GA4 interface.

In the Triggering section, select Initialization – All Pages .

Name the tag and save it.

Test the GA4 installation:

Click Preview in the top right corner of the GTM interface.

Once you enable the preview mode, you should see the new GA4 tag among the tags that fired. If your tag didn't fire, check your tag's trigger settings.

Publish your changes in GTM by clicking the Submit button in the top right corner and then completing all the other steps that the user interface asks you to do.

Website ROI Calculator Template

You can add Goals in your analytics page to determine how well your pages are performing. Import the information from your website or app into this website ROI calculator to determine the ROI for your web-based traffic. You’ll find a full website campaign overview in a roll-up sheet, which tells you which campaigns are the most successful so you can compare them.

‌ Download Website ROI Calculator - Excel

In this calculator template, you will find spreadsheets for each of your campaigns. The inputs for each campaign are as follows:

Date figures updated

Name of staff updating

ROI goal (percent)

ROI goal (days)

Site launch date

Number of unique visitors

Net number of unique visitors

Number pageviews

Development costs

Concept development

Operation, support, hosting

Internal resources

Other costs

Marketing costs

Calls to action and revenue

From these inputs, the following are your outputs:

Days site ran

Average pageviews (pages per visitor)

Total development and operations cost

Total marketing cost

Total development operations and marketing

Total revenue

ROI percent (greater than 0 percent is a profit)

Revenue/costs (percent investment returned)

Days to break even (at the current rate of activity)

Days to reach ROI goal (at current rate)

Prognosis: ROI based on the time period listed and the current rate

Another way to figure out the revenue from your web content is to look at your online sales. Each time you sell products on your website, you can use your digital content to push customers to your sales pages. Each time you post a blog article, there should be links your customers can follow to reach your products. From these page visits, look at the revenue earned over the period and the number of visits from your content.

There are other programs you can use to manage your social media and marketing content that you can purchase as well. Some of these plug into your existing software to make your reporting easier. It’s worth reviewing their features and ease of use for your company if your revenue is dependent on your social marketing content. Some of these apps include Hootsuite, Hubspot, Buzzsumo, and Quintly.

Healthcare Quality Initiative ROI Templates

With the cost of health care skyrocketing, state-sponsored and private health plans should be able to prove their ROI to measure the effect of their quality improvement initiatives. These seven worksheets can help you prove the ROI of your quality improvement initiative:

Initial Costs : In this template, the costs of the personnel involved in the initiative are laid out, as well as any additional costs such as supplies, contracted services, and equipment. The total costs of the initial investment are calculated. This is Year 1 costs.

Operating Costs : This spreadsheet template pulls data from your initial costs spreadsheet for Year 1 and allows you to add data for consecutive years of your initiative. You can add and adjust for additional staff and known costs, and then the worksheet calculates the total costs for each year.

Claims-Intervention : Data from claims is used to estimate savings per year. Inputs for this spreadsheet include the actual payments from each claim category and the estimated savings by claim category for each year, the monthly membership for the initiative, and the number of months in the year the initiative was operational.

Claims-Control : Data from a control group of claims (without the intervention) shows a difference in the intervention versus changes that are an artifact of other reasons. It is important to maintain a control group to show that improvements come from your initiative and not from other or natural progressions.

Claims-Incremental : This spreadsheet compiles data from your claims-control and claims-intervention spreadsheets to determine your savings, and whether these savings are relevant to your quality initiative.

ROI : This spreadsheet automatically compiles data from your other spreadsheets and calculates the total discounted annual investment costs, the total discounted annual savings, and the ROI summary, which includes undiscounted annual net cash flows, cumulative ROI, net present value, and internal rate of return.

ROI-Incremental : Like the ROI spreadsheet, this template calculates the savings and ROI summary, but for incremental data.

‌   Download Healthcare Quality Initiative ROI Templates

Project ROI Templates

There are many projects that require you to calculate ROI. Some of these may be due to technology or software system changes that can get extremely expensive, so being able to report ROI to your stakeholders becomes critical.

IT ROI Calculator Template

The following is an IT ROI calculator for any basic IT initiative or project. This calculator provides columns to include data for up to eight years, but you can add more years as columns. Inputs include the following:

Cost savings by year

Selection costs

Implementation costs

Ongoing costs

Project discount rates

The outputs from this include subtotals of each, cash flow, cumulative cash flow, and results. The results include the following:

Total project cost savings/income

Total project expenditures

Net project savings/income

ROI (after five years)

Net present value (NPV)

Internal rate of return (IRR)

Payback (breakeven) year

For ease of reporting, charts have been included that automatically show yearly project cash flows, overall project implementation analysis, and overall project cost savings/income analysis.

‌ Download IT ROI Calculator

ROI Calculator for Product Lifecycle Management (PLM) Systems

Another software ROI calculator is for product lifecycle management (PLM) systems. Inputs for this calculator include the following:

Organization total revenue

Three-year total investment

Cost of capital

Direct cost of goods

Direct cost of goods benefit

Current operating margin

Current new product revenues

New product growth

Total research and development cost

Product development savings

Scrap reduction

Total inventory cost

Total labor cost

ECO labor cost/annum reduction

Percent total investment per year

Outputs from this calculator include the following:

Investment amounts

Part standardization benefit

TTM and collaboration

PDM savings

ECO reduction savings

Rework savings

Net cash flows

Use the diagram that visually shows the NPV of cumulative cash flow to update your stakeholders.

‌ Download ROI Calculator for Product Lifecycle Management (PLM) Systems

Business Case and Event ROI Template

Building a business case helps your team or company justify the funding in any proposal. This is the expected benefit from any undertaking, whether you are making a case for replacing old equipment or starting a fresh marketing program. Using ROI and other cash flow metrics are an excellent method to help you build your business case — especially in the case of technology investments where financial managers can identify expected costs and benefits to calculate ROI. For example, you may want to make a business case for an event your company is considering hosting. Based on the ROI of past events, you can give your company information on what level of event is relevant for their goals. For example, you can make a case for a large formal event rather than a small less-costly cocktail party if the ROIs are markedly different, and the large event generates more customers. Use this simple event ROI calculator template to discover what ROI your past events yielded by inputting the number of attendees, costs, and deal information. The outputs then give the event cost per person, the ROI, and the ROI percent.

‌ Download Business Case and Event ROI Template - Excel

Justification and Total Cost of Ownership ROI Template

In the same vein as proving a business case, a business plan must have some type of economic justification to provide stakeholders with the knowledge that they are making sound policy and finance decisions.  ROI is an appropriate choice, although it does not consider the intangible or fuzzy costs and the benefits that a cost-benefit analysis (CBA) might reveal. However, since those measures are fuzzy, they may not accurately represent the data anyway.

Total cost of ownership (TCO) helps assess costs across an enterprise for products or systems. Mainly used in IT, TCO generally includes not only the hardware and software, but the acquisition, management, support, expenses, training, and any other productivity losses to be expected during implementation. This calculation is made using data over a number of years, so you can present the TCO lifecycle. TCOs can be used to comprehensively justify new software purchases — especially since they are generally such expensive prospects. TCO is the negative data in an ROI equation that shows what you are spending.

Additionally, many professionals interested in TCO also want cost avoidance data, or the positive data in an ROI equation. For example, with both TCO and cost avoidance, you can calculate the ROI of replacing a software system that performs some function that saves you money.

Use this template for such a scenario, where the TCO of a software system (such as a virtual briefing platform) and the cost avoidance of a virtual briefing are combined to discover ROI. You can also use the template independently to determine either TCO or cost avoidance. In this template, you will find space to input your direct and indirect costs across several years. Inputs include costs for the following: 

Implementation

Programmatic work

There is also space to enter cost avoidance data. The following are calculated from the input data:

Total cost of ownership/year

Total substitution cost avoidance

Total potential cost avoidance

Potential ROI

Potential ROI percent

Potential ROI/year

‌ Download Justification and Total Cost of Ownership ROI- Template – Excel

Simple ROI Templates

An ROI analysis can vary in the levels of its complexity. Regardless of the amount of data, the basic ROI formula details three steps:

Estimate the Cost : Costs may be hard or soft, depending on the project or event planned. Hard costs are simple and are anything that comes with a receipt, such as travel costs, registration fees, and entertaining costs. Each of these can be a line item when you build or use an ROI calculator. Soft costs are more complex since they can include the number of hours spent on preparing, attending, and following-up after the event. This can also include the time spent corresponding, researching, and traveling. Multiply these “soft” hours by the employees’ hourly rate from their base pay to calculate the soft cost. Combine the hard and soft costs for a  better representation of the cost estimate.

Estimate the Return : First, define your success metric. For a conference-type event, this may vary, but consider the type of event and your company’s function in the marketplace. Your team should help you define your success metrics. Defining success metrics is part art, part science. If the metrics are developed, they should align with your strategic plan and your key performance indicators (KPIs) .

Compute ROI : Calculate ROI by dividing the activity return by its cost. Below is another formula you may follow:

ROI = (Gain from investment – Cost of investment) / (Cost of investment)

Simple ROI Calculator Excel Template

The attached simple ROI calculator is an Excel template. ROI may be calculated in Excel, but there is no specific formula for it — it simply displays inputs and outputs to help you come up with the final number. In this template, you will find four different methods to calculate ROI. But, you will always need to enter either your original investment value or share price.

Download Simple ROI Calculator Template

The four methods in the above template include net income method, capital gain method, total return method, and the annualized method: Net Income Method: Divide net profit by total assets. Enter your original investment value and its net income, which is what was earned less the taxes and deductions.

Capital Gain Method : Subtract your cost base from your capital proceeds. Enter your original share price and the current share price.

Total Return Method : The actual rate of return on an investment over a period of time, including capital gains, interest, and any dividends. Enter the original share price, your dividends, and the current share price.

Annualized Method: This is the geometric average amount earned every year over a given time. It is geometric to show compounding. Enter the original share price, the sale share price, when you purchased the share(s), and when you sold them.

What Is a Return on Investment (ROI)?

Companies use ROI to gauge the profits from any type of investment, whether time, money, or energy. Return on investment (ROI) is a performance measure that can be calculated in simple cases through a formula or in more complex cases via a template with multiple formulas. Calculations occur when you input what is spent versus what is earned. It can also be an investment view of a company’s cash flow via an action they took. In other words, the benefit of an investment is divided by the cost to see if it was worth making. ROI has many interpretations, depending on the business industry. For many businesses, ROI is simply the measurement of financial gain or loss relative to the costs such as deductions, fees, labor, or resources.

In project management, ROI helps businesses determine whether they want to invest in specific projects, and in the case of several projects, to decide between them. In the case of long-term projects, businesses must take into account inflation and future income to accurately calculate ROI. In the case of some quality projects, the ROI may be difficult to calculate because it’s hard to turn non-quantifiable data such as ideas and good feelings into monetary values. For example, spending money to put in a new breakroom may make your employees happier and feel more positive towards their environment. However, it’s difficult to calculate the revenue of a new break room.

ROI is used as a concept and a specific formula. As a concept, it can measure profitability or efficiency. People refer to ROI when discussing what they get back for their input. However, ROI is a true metric that can be calculated as a ratio or percentage. The basic formula to calculate ROI is:

ROI = Net Profit / Total Investment *100

You would use ROI for several reasons:

Provide Quantifiable Value : ROI provides leaders with information about a project’s worth, and can help garner their support by removing uncertainty and subjective benefits.

Build Stakeholder Support : When a project is up for decision (whether or not it gets approved), calculating the ROI gives stakeholders the information they need to either provide or deny their support.

Show Additional Benefits : Calculating ROI becomes a forcing function for staff to determine benefits they may not have considered at the start of a project.

Prioritize Projects : Many companies use ROI as a metric to rank their projects.

However, ROI modeling has some limitations. Some models do not adequately factor in accurate-enough costs and returns. Soft, or intangible, costs are difficult to assess. Another issue is that the costs and returns of a project may not match predictions. Finally, some ROI models may not give more than a financial measure of a project, giving stakeholders an inadequate measure of return or making the project’s actual return misunderstood.

There is more than one way to model ROI, and different analysts can model differently, possibly mischaracterizing the outcome. Therefore, stakeholders and business leaders should ask not only the ROI of a project but how it was modeled. The effects that a project has on more than just the business are sometimes left out. For example, social return on investment (SROI) is a modern metric that considers social, economic, and environmental outcomes in projects. SROI uses impact mapping, which is a strategic planning technique.

The ROI Formula

ROI is calculated by subtracting the project cost from the financial value. Financial value is what the project pays you back, but occasionally there is uncertainty in assigning monetary values to outcomes. To do so, break the values into known components and define them. These components usually include time, volume, and dollars for both the present and the project, such as this formula:

Financial value = TVD present – TVD project

V = volume, quantity of units

D = dollars/cost

Present = the current value

Project = the value of a successful project

One example of using this formula considers a project that decreases the production cycle by 20 percent. The team calculated that the production cost of their product was $5,000. The time to produce one unit was 10 hours, with a $90/hour wage and $41,00 worth of materials. For the production of 500 of these units, the product line cost was $2.5 million.

The project decreased the production cycle time by 20 percent, from 10 hours to eight hours, while keeping the remaining costs the same. The new production cost is $4,820 per unit and $2.41 million for the yearly product line. Therefore, using the formula above, the project's financial value is:

Financial value = $2,500,000 - $2,410,000 = $90,000 in annual savings

The project cost is the second component of the ROI formula. There are two main variables that compose project cost: work decomposition over time and cost of the work. The work decomposition over time breaks down the work or tasks into the most granular level possible, and in best practice by chronological order. In project management, this may also be known as the work breakdown structure (WBS). Here’s an example:

Insert Chart Here

For more information about WBS, see “ Getting Started with Work Breakdown Structures (WBS) .”

The costs of the required work need the practitioner to consider certain factors when they allot costs. Even these factors they can vary widely, they can include the following:

Any rentals/leases

Resources, such as workers

Hours to complete the work

Capital costs (hardware/software)

Once you have these costs defined, you can add them to your WBS, such as in the following example:

Some other methods of breaking down work include the following:

Gantt Charts : These are the WBS over time, and put your tasks into phases of work. To create your own, see “ How to Create a Gantt Chart in Excel .”

Process Maps or Process Flow Diagrams : These show the project work as workflow steps. This is a visual representation of your work. For more information on process maps, see “ Essential Guide to Business Process Mapping .”

These are all helpful tools to cost out your projects, but practitioners should also consider the following:

One-time Costs Versus Costs Over Time : Some equipment may be a one-time purchase or a rental over years. Include those costs over the period to get accurate ROI figures.

Consider What the Opportunity Cost May Be : When you have more than one project to compare, there may be savings you can attribute back to your company. Remember that the opportunity to perform the project may have value.

Estimate Liberally : Whenever there is a gray area for cost estimation, estimate higher. Cost overruns delay projects and erode confidence.

Once you have calculated all the financial values and project costs, the ROI formula is simple. Let’s assume in the following example that there is a one-time cost of $400,000 for our project to decrease the production time by 20 percent. In this example, Year 5 breaks even, and as the company goes forward, there is an appreciable saving:

ROI and Returns-Based Analysis

Another calculation that is important in a discussion of ROI is returns-based analysis . The financial industry performs style analyses when they are trying to determine the type of investment behavior either an investor or a money manager is using. Two distinct types of styles are holdings-based and returns-based. Returns-based is more widely used by financial professionals because monthly input data is readily available. The returns-based analysis compares three to five years of a portfolio’s monthly returns to the total returns of various style-based indexes. Inferences can be made about how closely the portfolio resembles the different indexes. In other words, a fund manager or investor professes that they will invest in a certain manner. A returns-based analysis is a model that shows if they have done so. Although not directly calculating ROI, a returns-based analysis can help determine whether your investment manager is worth their cost.

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Plan Projections

ideas to numbers .. simple financial projections

Home > Calculators > Return on Investment Calculator

Return on Investment Calculator

This return on investment calculator will help you to calculate return on investment for use in the Financial Projections Template and your business plan.

The Excel ROI calculator, available for download below, helps a business calculate return on investment.

How to use the Return on Investment Calculator

To use the return on investment worksheet enter details relating to the investment and the exit valuation.

Firstly enter the following details in relation to the investment.

• The amount invested in the business.
• The percentage of the business equity purchased.
• The number of years after which the investor exits the business.

Value on Exit

Secondly enter the following details relating to the exit valuation

• The PE ratio for the business.
• The annual profits on which to base the valuation

Additionally our blog article on return on investment gives full details of how this return on investment calculator can be used.

Return on Investment Calculator Download

The return on investment spreadsheet is available for download in Excel format by following the link below.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Return on Investment (ROI) Calculator

Related: Investment Calculator | Average Return Calculator

In finance, Return on Investment, usually abbreviated as ROI, is a common, widespread metric used to evaluate the forecasted profitability on different investments. Before any serious investment opportunities are even considered, ROI is a solid base from which to go forth. The metric can be applied to anything from stocks, real estate, employees, to even a sheep farm; anything that has a cost with the potential to derive gains from can have an ROI assigned to it. While much more intricate formulas exist to help calculate the rate of return on investments accurately, ROI is lauded and still widely used due to its simplicity and broad usage as a quick-and-dirty method. Many money-making schemes involve several businessmen seated at a table during lunch talking about potential investments until one of them exclaims about one with a very high ROI after doing the calculations on a napkin.

ROI may be confused with ROR, or rate of return. Sometimes, they can be used interchangeably, but there is a big difference: ROR can denote a period of time, often annually, while ROI doesn't.

The basic formula for ROI is:

As a most basic example, Bob wants to calculate the ROI on his sheep farming operation. From the beginning until the present, he invested a total of $50,000 into the project, and his total profits to date sum up to $70,000.

Bob's ROI on his sheep farming operation is 40%. Conversely, the formula can be used to compute either gain from or cost of investment, given a desired ROI. If Bob wanted an ROI of 40% and knew his initial cost of investment was $50,000, $70,000 is the gain he must make from the initial investment to realize his desired ROI.

Difficulty in Usage

It is true that ROI as a metric can be utilized to gauge the profitability of almost anything. However, its universal applicability is also the reason why it tends to be difficult to use properly. While the ROI formula itself may be simple, the real problem comes from people not understanding how to arrive at the correct definition for 'cost' and/or 'gain', or the variability involved. For instance, for a potential real estate property, investor A might calculate the ROI involving capital expenditure, taxes, and insurance, while investor B might only use the purchase price. For a potential stock, investor A might calculate ROI including taxes on capital gains, while investor B may not. Also, does an ROI calculation involve every cash flow in the middle other than the first and the last? Different investors use ROI differently.

However, the biggest nuance with ROI is that there is no timeframe involved. Take, for instance, an investor with an investment decision between a diamond with an ROI of 1,000% or a piece of land with an ROI of 50%. Right off the bat, the diamond seems like the no-brainer, but is it true if the ROI is calculated over 50 years for the diamond as opposed to the land's ROI calculated over several months? This is why ROI does its job well as a base for evaluating investments, but it is essential to supplement it further with other, more accurate measures.

Annualized ROI

The ROI Calculator includes an Investment Time input to hurdle this weakness by using something called the annualized ROI, which is a rate normally more meaningful for comparison. When comparing the results of two calculations computed with the calculator, oftentimes, the annualized ROI figure is more useful than the ROI figure; the diamond versus land comparison above is a good example of why.

In real life, the investment risk and other situations are not reflected in the ROI rate, so even though higher annualized ROI is preferred, it is not uncommon to see lower ROI investments are favored for their lower risk or other favorable conditions. Many times, ROI cannot be directly measured, such as the investment of advertising a product. The ROI in such situations is normally estimated via the marginal sales benefit or brand recognition.

I refuse to pay my daughter's college tuition even though I made over $500,000 last year

• Andrea Mac, a business owner who made $550,000 last year,  refuses to pay her daughter's tuition.
• Mac questions the value of investing such a significant amount of money into a college education.
• She and her husband want to instill independence, responsibility, and success in their children.

This as-told-to essay is based on a conversation with Andrea Mac , a growth strategist at   Prequal   from the Greater Chicago area. It's been edited for length and clarity.

For the last seven years I've built a business that made just under $550,000 in 2023. I'm projecting that I'll make seven figures in 2024.

Despite this income, my husband and I have not agreed to — nor do we plan to — pay for the college tuition of our oldest daughter, a sophomore at the University of Iowa.

Stating that feels vulnerable and unpopular because, within our network, this is an uncommon or less commonly talked-about choice. But we didn't make this decision lightly, and we considered many factors.

Seven key considerations went into our decision.

1. Fostering autonomy and independence in our children

When everything — including school choice, scholarships, performance, and even access to grades — is dictated or overseen by parents, students can become passive participants in their education. By not paying for college , we want our children to own their academic journey fully. This means they'll need to make crucial decisions, seek scholarships, and manage their finances, which will help them truly understand the value of their education.

To be fair, we've decided that we, as parents, don't get to choose which college our children attend. If they spent our money on tuition, we'd need a say in that decision. Instead, we've told our college-age daughter: You can choose to attend a college that costs $5,000 or $100,000 a year, but we're not writing a blank check.

2. Making sure they understand the privilege of attending college

My husband and I feel that pursuing a college degree is not a rite of passage but a choice and commitment to higher education.

As a young adult transitioning from high school, it's the perfect opportunity to evaluate the opportunity cost critically, the investment of both time and money, and the projected return on investment from such a commitment.

If they choose college, this sense of ownership can drive them to perform better and take their studies more seriously. Knowing they've worked hard to contribute to their education can instill pride and accomplishment.

3. Keeping our financial future secure

We've worked very hard to achieve economic mobility and to live in a neighborhood that offers the best educational opportunities we can afford. I've worked, and continue to work, diligently to provide for our family of six.

Related stories

Committing about $800,000 — an average of $200,000 per child for a four-year university degree — could jeopardize our future financial security . Paying for college for four children would stretch our finances beyond what we're willing to risk.

For example, investing $200,000 over four years into scaling my consultancy firm could produce more revenue and provide more significant long-term benefits for our family. Likewise, with an average annual return for stock-market investments at about 10%, that same $200,000 could yield almost an additional $100,000 in return over that same four-year time period.

4. Living within our means

Financial prudence is a core value for us. We're not willing to take on debt to pay for college . We believe in financial stability and the importance of living within our means.

This decision aligns with our commitment to avoid debt and maintain a healthy financial position, which benefits our entire family.

5. Considering the return on investment

Education is an investment, and we consider the potential return like any investment. With rising tuition costs, my husband and I think it's essential to evaluate whether the outcomes in terms of ROI justify the financial outlay for college.

We question the value of investing such a significant amount of money into a college education , especially when there are alternative paths to success that don't involve incurring massive debt.

6. Maintaining equality between siblings

We have four children aged 5 to 19, and we care about equality among siblings. Committing to paying for one child's college education means we must do the same for all of them to maintain fairness.

This long-term financial commitment could span many years, potentially affecting our ability to support our younger children in other meaningful ways. We want to ensure our financial decisions don't create inequality among our children.

7. Avoid fostering a sense of entitlement in our children

By making them responsible for their college expenses, we hope to instill a strong work ethic and a sense of responsibility in our kids. We also hope our choice will help them understand the value of hard work and the importance of making prudent financial decisions.

We're encouraging our children to take responsibility for their education and financial choices

Our children must evaluate cost-effective options, seek scholarships, and consider alternative education paths like community college, vocational training, or starting their careers earlier. This approach teaches them to be pragmatic and resourceful, skills that will serve them well throughout their lives.

Evaluating whether to pay for our kids' college tuition was a challenging decision, but it's rooted in our desire to foster autonomy, responsibility, and financial prudence.

Ultimately, by empowering our children to take charge of their education and finances, we feel we're helping to set them up for a lifetime of independence, responsibility, and success. 

If you are teaching your children a unique financial lesson and would like to share your story, email Manseen Logan at [email protected] .

Watch: Supreme Court strikes down Biden's student-debt relief plan

• Main content

Unilever USA Change location

Why we’ve updated our Climate Transition Action Plan

Published: May 16, 2024

Our updated Climate Transition Action Plan (CTAP) sets out Unilever’s ambitious new climate targets. Discover how we’re focusing our efforts so we can deepen our impact by 2030, and why we believe taking urgent climate action now is good for our business in the long term.

Sustainability has been important to Unilever for many years and responding to climate change has been a key part of this. We’ve reduced our operational greenhouse gas (GHG) emissions by 74% since 2015, largely through our transition to renewable electricity, and we’ve also lowered the climate impact of our products.

But as we look to our long-term ambition of reaching net zero across our value chain, the challenges we’re facing are changing and our solutions need to change too. We’re entering an era which rightfully places more scrutiny on how and when corporate climate action happens and we needed to evolve our strategy so that by 2030 we can achieve deep cuts in the emissions outside our direct control, while simultaneously growing our business.

Making sure we focus our efforts

Over the years, we’ve learnt a lot about what works and what doesn’t. We plan to use that experience, coupled with new developments in science, technology and innovation, and working in collaboration with others, to focus our efforts where we can have most positive impact.

Our updated Climate Transition Action Plan (CTAP), which was supported by 97.5% of our shareholders at our 2024 AGM, outlines our strategy for reducing emissions in the short term, while we also put in place the building blocks to deliver in the long term. It includes new stretching near-term science-based targets for lowering our GHG emissions by 2030, approved by the Science Based Targets initiative, as well as ten action areas across our value chain.

CTAP is really important, because it enables us to understand where our emissions sit across our business and our value chain. We’ve now got time-bound costed roadmaps that enable us to take action in each of the business groups. That means less exposure to volatility in the energy markets and more security of supply in key crops and commodities. Rebecca Marmot, Chief Sustainability Officer at Unilever

Driving urgent action: understanding return on investment

To accelerate our delivery, we want to make our CTAP integral to how we assess our business performance, setting key short-term deliverables, and hard-wiring the steps we need to take to reduce our emissions into our strategic planning and budget cycles. We’ve worked with each of our business groups to develop time-bound costed roadmaps, so that their targets and actions are embedded in their respective financial growth plans and, as extra incentive, we’re also linking rewards to the delivery of sustainability performance.

We’re already seeing some of the business benefits. Energy efficiency projects have saved Unilever well over €1 billion since 2008, and in recent years our regenerative agriculture projects have helped to build more resilient supply chains, reducing emissions and costs in the process.

But these returns do require upfront investment. Over the next three years, we will invest €150 million in our manufacturing decarbonisation programme, focusing on the decarbonisation of our thermal and electrical energy, increasing our use of renewable power, and reducing emissions from refrigeration. We’re also investing in protecting nature, putting €325 million into our Unilever oleochemicals facility in Indonesia, which will help us meet current and future demand for deforestation-free commodities. And we’re continuing to invest €1 billion in climate, nature and waste reduction projects by 2030 – of which we had already spent and committed €300 million by the end of 2023.

We will need to be more systemic in our advocacy

We know there are still challenges for delivering on our goals, some of which we cannot overcome without wider systems change. Within the CTAP, we’ve outlined our dependencies and how we will need to work with governments, regulators, industry and consumers to address barriers, drive innovation and scale solutions, now and in the years ahead.

Collaboration with key suppliers to accelerate climate action, with industry to find alternatives to chemical ingredients, with trade associations (PDF 1.39 MB) to align on our positions and with governments as we step up our advocacy will all help us to deliver our vision of a new era of sustainability leadership, under our Growth Action Plan.

By more forcefully using our voice and convening power to address enablers and blockers of our progress, we believe we can move faster towards our goals and help accelerate the transition to net zero – while also driving success for our business.

We can’t do this alone, we need others. Collaboration is at the heart of how we have approached sustainability so far – and that’s something I think we should keep on doing. Hein Schumacher, CEO of Unilever

Watch Unilever's CEO Hein Schumacher and Chief Sustainability Officer Rebecca Marmot as they discuss the CTAP and explain the business case for urgent climate action.

Watch CBS News

Some companies plan to increase return-to-office requirements, despite risk of losing talent

By Khristopher J. Brooks

Edited By Anne Marie Lee

Updated on: May 29, 2024 / 6:38 PM EDT / CBS News

A quarter of U.S. companies will require its workers to show up at the office more often next year, even though doing so may cause some productive staff members to leave.

That's according to new  findings  from ResumeBuilder.com which surveyed 756 employers at companies with return-to-office policies in place since 2021. RTO mandates have been one of the most divisive issues in corporate America since the nation emerged from the pandemic, with companies and employees often  clashing over policies.

Among companies planning to require an increased number of days in office, 86% cited productivity as the top reason for doing so. That was followed by a desire to improve company culture (71%), employee well-being (57%) and retention (55%). 

However, the findings of at least one study on RTO mandates seems to contradict those motives. Research from the Katz Graduate School of Business at the University of Pittsburgh, found that RTO mandates have no impact on companies' financial performance. It also found that RTO policies can cause a "significant decline"  in employee satisfaction . That may explain why 80% of companies in Resume Builder's survey said they have lost talent as a result of their RTO policy. 

"Unfortunately, I think many business leaders make assumptions about things like productivity, culture, and employee well-being,"  Julia Toothacre, resume and career strategist at Resume Builder, said the report. "Productivity is a result of clear expectations and good management. Culture is driven by people, not physical spaces, and employee well-being is more about how people are managed, their stress levels, and the amount of flexibility they have."

The survey also found that 45% of companies will not push employees to come into the office more often next year, choosing to leave their current RTO policy as is. Another 21% said employees will be allowed to come in less frequently in 2025.

Still, an overwhelming 93% of business leaders believe employees should be physically present in the office and therefore support RTO mandates. Most employers currently require that employees work in office a certain number of days, with 38% enforcing a minimum of three days per week. Amazon, Apple, and Starbucks are among the companies now requiring workers to come in three days a week.

As work-life balance becomes a higher priority for employees, however, Toothacre says companies can expect more walkouts as a result of RTO mandates.

"People may have moved and aren't willing to move again to keep their position," she said. "It's also possible that there are familial responsibilities that require a flexible schedule or the need to be at home. Some people also like working from home or remotely and don't want to return to an office environment."

ResumeBuilder.com drew its results from a May survey of business owners, human resource managers, supervisors, CEOs, senior managers and other top decision-makers at companies. The respondents were all over age 25, made over $75,000 a year and had an education higher than a high school diploma. 

Khristopher J. Brooks is a reporter for CBS MoneyWatch. He previously worked as a reporter for the Omaha World-Herald, Newsday and the Florida Times-Union. His reporting primarily focuses on the U.S. housing market, the business of sports and bankruptcy.

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