What is return on investment?
ROI measures net profit relative to the cost you incurred, expressed as a percentage. It is the most widely used metric for comparing the merit of different opportunities.
Example: you invest 50,000 and receive 65,000 back. Net profit is 15,000, so ROI = (15000 ÷ 50000) × 100 = 30%.
A positive ROI is not automatically a good investment A 10% return in one month is excellent; the same 10% over five years is very poor. This is why opportunities must be compared on an annualised basis, not on total return.
Annualised ROI — the fair comparison
To compare a two-year investment against a seven-year one, you must convert the return into an annual rate:
Example: an investment grows from 100,000 to 180,000 over 5 years. Total return is 80%, but the compound annual rate = ((180000 ÷ 100000)^(1/5) − 1) × 100 = 12.47% per year.
| Total return | Period | Annualised |
|---|---|---|
| 50% | 1 year | 50.00% |
| 50% | 3 years | 14.47% |
| 50% | 5 years | 8.45% |
| 100% | 5 years | 14.87% |
| 200% | 10 years | 11.61% |
ROI vs ROAS
These two get confused constantly in digital marketing:
- ROAS = revenue ÷ ad spend. It ignores cost of goods and every other expense.
- ROI = net profit ÷ total cost. It includes everything and tells you whether you actually made money.
Use ROAS to judge campaign performance, and ROI to judge whether the business as a whole is profitable.
Limitations of ROI
- It ignores time: unless annualised, comparing different holding periods is misleading.
- It ignores risk: a 40% return on a high-risk venture is not necessarily better than a guaranteed 15%.
- It depends on cost accuracy: omitting indirect costs such as your own time inflates the result.
- It ignores inflation: nominal return differs from real return once inflation is deducted.
Frequently asked questions
How do I calculate ROI?
Subtract the cost from the return to get net profit, divide by the cost, then multiply by 100. A 50,000 cost returning 65,000 gives an ROI of 30%.
What is the difference between ROI and ROAS?
ROAS compares revenue to advertising spend only, while ROI accounts for net profit after all costs. ROI is the more accurate measure of real profitability.
What is a good ROI?
It depends on sector, risk and time horizon. Historically the stock market returns roughly 7–10% per year, so investments are often benchmarked against that, adjusted for risk.
How do I calculate annualised return?
Raise the ratio of final to initial value to the power of (1 ÷ years), subtract 1, then multiply by 100. Use the annualised tab in the calculator.
Can ROI be negative?
Yes. If the return is less than the cost, ROI is negative, indicating a loss. A 40,000 return on a 50,000 cost gives an ROI of −20%.
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