ROI (Return on Investment) is a performance measure calculated as (Gain − Cost) ÷ Cost × 100%, used to evaluate how efficiently an investment generates profit.
How ROI Works
ROI expresses the profit or loss from an investment as a percentage of its cost. A positive ROI means you made money; a negative ROI means you lost money. It is the most commonly used metric for comparing the efficiency of different investments because it normalizes returns to a common scale.
The simplicity of ROI is both its strength and its limitation. It does not account for the time period of the investment, so a 50% ROI over 10 years is very different from 50% ROI over 1 year.
The ROI Formula
ROI = (Final Value − Initial Cost) ÷ Initial Cost × 100%
For time-adjusted comparisons, use CAGR (Compound Annual Growth Rate) or annualized ROI, which accounts for the holding period.
Why ROI Matters
ROI helps investors, business owners, and marketers make data-driven decisions. Whether evaluating a stock, a marketing campaign, or a real estate purchase, ROI provides a quick way to assess whether the expected return justifies the cost and risk.
Real-World Example
You buy a stock for $5,000 and sell it 3 years later for $7,500. ROI = ($7,500 − $5,000) ÷ $5,000 × 100% = 50%. The annualized return (CAGR) is (7,500/5,000)^(1/3) − 1 = 14.5% per year.
Frequently Asked Questions
What is a good ROI?
It depends on the investment type. The S&P 500 has historically returned about 10% per year. Real estate typically targets 8-12%. Any ROI above the risk-free rate (Treasury bonds, ~4-5%) can be considered positive.
What is the difference between ROI and CAGR?
ROI shows total return regardless of time. CAGR (Compound Annual Growth Rate) shows the equivalent annual return, making it easier to compare investments held for different time periods.
Can ROI be negative?
Yes. A negative ROI means the investment lost money. For example, buying a stock for $10,000 and selling it for $8,000 gives an ROI of -20%.