Investment
How To Calculate ROI
Return on investment expresses what you gained as a percentage of what it cost you. That single normalization is why ROI survives every criticism leveled at it: it works on a stock, a rental property, or a training program with exactly the same arithmetic.
Quick Answer
ROI = (Current Value - Cost) / Cost x 100%
- Current Value
- What the investment is worth now, plus any income it paid along the way
- Cost
- Total cost basis: purchase price plus fees, closing costs and improvements
- Net Return
- Current Value - Cost (negative if the position lost money)
- ROI
- Net return as a percentage of cost
Subtract the total cost basis from the current value of the investment, divide by the total cost basis, and multiply by 100 to get a percentage. Include every cost that was required to obtain and hold the investment, and every return it produced.
What Is ROI?
ROI answers one question in the language of percentages: for every dollar risked, how many cents came back. A 22% return means each dollar produced twenty-two cents. Because both numerator and denominator are money, the result is unitless and comparable across wildly different asset types.
The numerator and denominator are where the real work is. Value is not just the sale price — it includes dividends, rent, interest or any other cash the asset produced while you held it. Cost is not just the purchase price — it includes commissions, closing costs, improvements and any ongoing expense you were required to pay. Companies choosing between a $40,000 equipment upgrade and a digital campaign are comparing apples to apples precisely because ROI forces both into the same structure.
The metric's most criticized weakness is that it has no clock. A 22% return realized over eleven months beats a 22% return realized over eleven years, but plain ROI reports them identically. Whenever two opportunities span different periods, convert to an annualized figure before ranking them. ROI alone answers how much, never how fast.
The annualized conversion pairs naturally with it: multiply the growth factor (1 + ROI) by itself compounded over 1 / years held, then subtract one. A 22.5% return over three years annualizes to roughly 7.0%, which suddenly looks much less impressive next to an 8% one-year instrument. That single adjustment is the difference between a ranking that is correct and one that quietly picks the slower option.
ROI also assumes the result can be measured, which is not always true. Brand campaigns, employee training and security improvements generate value that nobody invoices. Analysts handle this by assigning a modeled value and saying so explicitly, which keeps the number honest about what it is: an estimate built on an assumption, not a market observation.
Finally, ROI ignores risk. Two strategies can both return 12% while one of them does so with a chance of losing everything in a bad quarter. Reading ROI next to volatility, drawdown, and time horizon is what turns it from a headline into a decision input.
Formula
ROI = (Current Value - Cost) / Cost x 100%
Net return divided by cost basis. A negative numerator means the investment lost money, and ROI comes out negative.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| Cost | Total cost basis | currency | Purchase price plus commissions, closing costs, improvements and mandatory carrying costs. |
| Current Value | Ending value plus interim income | currency | Sale proceeds plus any dividends, rent or interest received while held. |
| x 100% | Percentage conversion | percent | Multiply the decimal result by 100 to read it as a percentage. |
Annualized ROI = (1 + ROI)^(1/t) - 1
Converts a multi-year return onto a per-year equivalent so opportunities with different horizons can be ranked directly. Only valid when the interim income can be assumed to compound at the same rate.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| t | Holding period in years | years | Fractions allowed: an eleven-month hold is 0.917 years. |
How To Calculate ROI
- 1
Total every cost required to own the asset
Start with the purchase price and add commissions, closing costs, shipping, installation and improvements — anything you could not have avoided while acquiring it. This sum is the denominator, and understating it inflates ROI more than any other error here.
- 2
Total every return the asset produced
Sale price plus all interim income: dividends, rental receipts, interest, lease payments. If the asset is still held, use its current market value rather than what you paid for it — an unsold position still has a realizable value.
- 3
Subtract cost from value to get net return
This is the numerator and it can be negative. A $9,400 sale on an $8,000 basis gives $1,400; a $7,200 sale gives a −$800 net return, which is a legitimate and useful result rather than an error.
- 4
Divide by cost and convert to a percentage
$1,400 / $8,000 = 0.175, or 17.5%. Always divide by the cost basis, never by the sale price — dividing by the larger figure silently understates the return.
- 5
Annualize if you will compare it to anything
Raise (1 + ROI) to the power 1/t and subtract 1. Comparing a raw multi-year ROI against a one-year alternative is the single most common way this metric produces the wrong ranking.
Examples
Example 1: Stock position sold with dividends — $8,000 cost, $9,400 proceeds
- Cost
- $8,000.00
- Value
- $9,400.00
- t
- 1 year
| Step | Calculation | Result |
|---|---|---|
| Net return | $9,400.00 - $8,000.00 | $1,400.00 |
| Divide by cost | $1,400.00 ÷ $8,000.00 | 0.175 |
| Convert to percent | 0.175 x 100% | 17.5% |
Result: ROI = 17.5% over one year
Example 2: Rental property held three years — $280,000 cost, $63,000 total return
- Cost
- $280,000.00
- Value
- $322,000.00
- Interim income
- $21,000.00
- t
- 3 years
| Step | Calculation | Result |
|---|---|---|
| Assemble the cost basis | $250,000 + $12,000 closing + $18,000 renovation | $280,000.00 |
| Add sale proceeds to interim rent | $322,000.00 + $21,000.00 | $343,000.00 |
| Net return | $343,000.00 - $280,000.00 | $63,000.00 |
| Divide by cost | $63,000.00 ÷ $280,000.00 | 0.225 |
| ROI | 0.225 x 100% | 22.5% |
| Annualize over 3 years | (1 + 0.225)^(1/3) - 1 | 7.00% |
Result: ROI = 22.5% over three years; annualized ≈ 7.00%
Calculator
Return on investment
17.50%
- Net return
- $1,400.00
- Annualized ROI
- 17.50%
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the ROI calculator page.
Common Mistakes
Forgetting fees, closing costs and improvements in the cost basis
Using only the purchase price inflates ROI because every omitted euro comes straight out of the denominator. On a property with $30,000 of closing costs and renovations this can swing the answer by several percentage points.
Leaving interim income out of the numerator
Dividends, rent and interest are genuine returns. Reporting a 9.5% price-only gain when the position also paid 3% in dividends understates performance by nearly a quarter of its true total.
Comparing multi-year ROI against one-year alternatives
A 22.5% return over three years is about 7.0% a year, which loses to an 8% one-year instrument. Rank raw ROI figures across different horizons and you systematically favor the slowest option.
Dividing by the sale price instead of the cost
Return on investment is defined against what was committed, not against what came back. Dividing by the larger figure compresses every result toward zero and makes strong performers look mediocre.
Ignoring leverage and risk when reading the number
A cash purchase and a 20%-down mortgage can both show an attractive ROI on equity while carrying completely different downside. Two identical ROI figures say nothing about whether the return was earned with borrowed money or severe volatility.
FAQ
What counts as a good ROI?
There is no universal threshold, because it depends entirely on the alternative and the risk. Historically broad equity markets have returned roughly 7 to 10 percent a year before inflation, so anything meaningfully below that carries opportunity cost, while anything far above it usually carries risk that the percentage alone does not reveal.
Can ROI be negative?
Yes. When the asset is worth less than its cost basis the numerator is negative and ROI comes out below zero. A negative result is a valid measurement, not a calculation error, and should be reported as-is alongside the amount lost.
How is ROI different from net profit?
Net profit is an amount of money; ROI is that same amount expressed relative to what was invested. Profit tells you how much a venture made, ROI tells you how efficiently it used capital, which is what makes ventures of different size comparable.
When should I use annualized ROI instead?
Whenever you are comparing investments held for different lengths of time. Annualizing puts both on a per-year basis so the comparison is meaningful. Use plain ROI only when the holding periods match or when you simply want the total result.
Does ROI account for inflation or taxes?
Standard ROI uses nominal cash flows, so it does not. Real ROI subtracts inflation, and after-tax ROI nets out capital gains tax and tax on interim income. On long holds the difference between the nominal and real figure is usually large enough to change the decision.
References
- [1]Corporate Finance Institute, Return on Investment (ROI): Definition and Calculation — https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi/
- [2]U.S. Securities and Exchange Commission, Beginners' Guide to Financial Statements and Ratios — https://www.sec.gov/reportspubs/investor-publications
- [3]OpenStax, Principles of Finance — Measuring Investment Performance, 2024 — https://openstax.org/details/books/principles-finance