What ROI measures
Return on Investment is the percentage gain or loss on a given investment relative to its cost. It is the most-used way to compare investments because it converts every dollar amount into a single percentage:
ROI = (gain − cost) / cost × 100A $10,000 investment that returns $13,000 has an ROI of 30%. A $1,000 investment that returns $1,300 also has an ROI of 30%. The percentage controls for the size of the bet — useful when comparing options at very different scales.
Worked examples
- Stock purchase: bought $5,000 of shares, sold for $6,200 including dividends.
(6200 − 5000) / 5000 = 24% ROI. - Marketing campaign: spent $8,000, attributed $20,000 in new revenue.
(20000 − 8000) / 8000 = 150% ROI. - Rental property: $250,000 purchase, $24,000 net rental income over 3 years, sold for $280,000.
(24000 + 280000 − 250000) / 250000 = 21.6% ROItotal. - Bad investment: $2,000 in shares now worth $1,200.
(1200 − 2000) / 2000 = −40% ROI.
ROI doesn't measure time
A 30% ROI over 1 year is far better than a 30% ROI over 10 years. To compare investments held for different periods, annualize the return:
annualized ROI = ((1 + ROI)^(1/years) − 1) × 100A 30% total return over 5 years annualizes to (1.30^(1/5) − 1) × 100 ≈ 5.39% per year — a useful comparison to alternative investments like a savings account or bond.
Variants you will see
| Variant | Formula | Use case |
|---|---|---|
| Simple ROI | (gain − cost) / cost | Quick comparison of a single investment |
| Annualized ROI | ((1 + ROI)^(1/years)) − 1 | Comparing investments of different durations |
| ROAS (advertising) | revenue / ad spend | Marketing — does not subtract the spend |
| ROE (corporate) | net income / shareholders equity | Measuring how well a company uses equity |
| ROIC (corporate) | NOPAT / invested capital | Measuring how well a company uses all capital |
| IRR | rate at which NPV of cash flows = 0 | Multi-period investments with irregular cash flows |
| MIRR | modified IRR using a finance rate | More realistic than IRR for reinvestment assumptions |
What ROI hides
- Time. A 100% ROI in 10 years is worse than 12% per year compounded.
- Risk. An investment that returned 30% with a 50% chance of −60% is not worth more than one that returned 8% reliably.
- Opportunity cost. 20% ROI is great in absolute terms, mediocre if the market returned 25% the same year.
- Taxes. Capital gains, dividend, and ordinary-income tax rates differ. After-tax ROI is what actually compounds.
- Inflation. A 6% nominal ROI at 4% inflation is only ~2% real. Long-horizon comparisons must adjust for inflation.
- Hidden costs. Brokerage commissions, management fees, transaction taxes, maintenance — all reduce the actual return.
Marketing ROI vs investment ROI
Marketing ROI ("marketing ROI" or "ROAS") is computed differently across teams. The two common definitions:
- ROAS — revenue / ad spend. A $1,000 campaign that drives $4,000 revenue has 4:1 ROAS. Does not subtract the spend.
- Marketing ROI — (revenue − cost) / cost. The same campaign has 300% marketing ROI.
The trap is using revenue instead of gross profit. If the product has 30% gross margin, the $4,000 revenue is only $1,200 of profit — barely above the $1,000 spend. Always specify whether ROI uses revenue, gross profit, or net contribution.
Real-world ROI benchmarks
| Investment type | Long-run nominal ROI | Notes |
|---|---|---|
| U.S. broad stock index | ~10% annualized | Last century; high variance year to year |
| U.S. Treasury bonds (long) | ~5% annualized | Lower variance |
| High-yield savings | 0.5–5% (rate-dependent) | Tracks Fed rate |
| Real estate (avg, leveraged) | ~10–12% IRR | Highly location-dependent |
| Small business acquisition | 20–40% IRR | Higher risk, illiquid |
| Venture-backed startup (avg) | Median 0%, IQR wide | Power-law distribution |
Compare any investment ROI to a relevant benchmark before judging it. Equity investors should aim to beat the S&P 500 net of fees and taxes; otherwise an index fund is the better default.