What is ROI?
ROI tells you how much you got back for what you put in. It's simple, flexible and widely used, from capital projects to marketing campaigns.
Formula
ROI = (Gain from investment − Cost of investment) ÷ Cost of investment × 100
Example
A business spends $20,000 on new equipment that generates $26,000 of additional profit over its life. ROI = (26,000 − 20,000) ÷ 20,000 = 30%.
A $5,000 ad campaign that produces $12,000 of gross profit has an ROI of 140%.
Limitations
- Ignores time: a 30% return over one year is very different from 30% over five. Use annualised ROI, IRR or [XIRR](/glossary/xirr) for multi-period investments.
- Ignores risk: compare against a [hurdle rate](/glossary/hurdle-rate).
- Inconsistent definitions: be clear whether "return" means revenue, gross profit or net profit.
Annualised ROI
Annualised ROI = (1 + ROI)^(1/n) − 1, where n is the number of years.
Related ratios
- Return on assets (ROA) = Net income ÷ Total assets
- Return on equity (ROE) = Net income ÷ Equity
- Return on capital employed (ROCE) = EBIT ÷ Capital employed