On This Page
- What does ROI mean?
- What is the ROI formula?
- What is annualized ROI?
- ROI in five situations
- Two traps that inflate ROI
- ROI in Excel
- How the calculator is verified
- FAQ
What Does ROI Mean?
Return on investment is how much came back for every dollar you put in, as a percentage. A 50% ROI means $0.50 of profit per $1 invested, and −20% means you lost $0.20 per dollar. The formula is the same for shares, rental property, a marketing campaign or a new machine; only what counts as "in" and "back" changes. ROI ignores time on its own, which is why the calculator also gives an annualized rate once you enter the years held.
What Is the ROI Formula?
Initial investment is everything you spent to make it happen: purchase price, fees, setup, renovation and closing costs. Leaving costs out makes the result look better than it was. Final value is everything you got back: sale proceeds plus dividends, rent collected plus the property's value, or the profit a campaign produced.
What Is Annualized ROI?
It converts a total return into an equivalent yearly rate, which investors call CAGR. $10,000 growing to $14,500 is a 45% total return, but over three years that is 13.2% a year. Doubling your money is excellent in one year and only 7.2% a year over ten. Compare investments of different lengths on the annualized figure. For periods under about six months, the annualized number is correct but not very meaningful.
ROI in Five Situations
| Situation | Put in | Got back | ROI |
|---|---|---|---|
| Shares held 2 years | 100 shares at $85 = $8,500 plus fees | Sold at $112 = $11,200 plus dividends | 31.8%, 14.8% a year |
| Rental property, one year (cash-on-cash) | $50,000 of your own cash (deposit, repairs, closing) | $21,600 rent − $16,200 running costs = $5,400 | 10.8% |
| Paid search campaign | $8,000 spend | $34,000 sales at a 40% margin = $13,600 gross profit | 70% |
| Amazon FBA unit | $6 product + $2 shipping + $4.20 referral + $3.50 FBA + $3 ads = $18.70 | $28 sale | 49.7% |
| Solar panels, 20 years | $15,000 net installed cost | $1,400 a year of savings = $28,000 | 86.7%, 3.2% a year |
Rental investors often aim for 8–12% cash-on-cash, and Airbnb-style lets work the same way with occupancy × nightly rate as income. For an FBA purchase order, enter the whole order: $7,250 of total costs against $9,500 of sales is 31%. For solar, the Solar ROI Calculator builds the savings side from your bill and rate increases; note that the 30% US homeowner tax credit ended for purchases after 2025.
Two Traps That Inflate ROI
Using revenue instead of profit. The $8,000 campaign above brought in $34,000 of sales, which looks like 325% ROI. After product costs, the profit is $13,600, a 70% ROI. A campaign that only breaks even on revenue is losing money. Check your margins with the Profit Margin Calculator before setting a target, and always say which basis you used. For SEO, which builds over time, annualized ROI tells you more than a snapshot. For paid ads, note which attribution model produced the revenue.
Leaving out costs or time. Brokerage fees, Amazon fees, closing costs and ad spend all belong in the investment, and a 45% total over three years is not a 45% year. Keep tax treatment consistent too, rather than comparing a pre-tax rental return with an after-tax stock return. To set a price that produces the return you want, work back from cost with the Markup Calculator.
ROI in Excel
With the investment in A1, final value in A2 and years in A3: net gain is =A2-A1, ROI is =(A2-A1)/A1 and annualized ROI is =(A2/A1)^(1/A3)-1, both formatted as percentages. Guard against zero years with =IF(A3=0,"N/A",(A2/A1)^(1/A3)-1).
How the Calculator Is Verified
The headline ROI figure is (final value minus initial investment) divided by initial investment, with no time variable anywhere in that calculation. Annualized ROI is a separate compound-growth formula, (final value ÷ initial investment) raised to the power of 1 divided by years, minus 1, and it only appears on screen once you enter a number of years greater than zero. A 20% raw ROI over six months and a 20% raw ROI over three years produce very different annualized figures once that second formula runs, because time only enters the calculation through the exponent in the second one.
Frequently Asked Questions
What is a good ROI?
It depends entirely on asset class and time frame. The long-run stock market average is roughly 8–10% annualized. Rental investors often target 8–12% cash-on-cash. Marketing campaigns in e-commerce typically need 200–400% ROI (revenue-based) to remain profitable after product costs. There is no universal benchmark, compare within the same asset class and always specify whether the figure is annualized or total.
What is the difference between ROI and profit margin?
ROI compares profit to the cost of the investment. Profit margin compares profit to revenue. At $100 selling price and $60 cost: ROI = $40 ÷ $60 = 66.7%. Profit margin = $40 ÷ $100 = 40%. ROI is used for investment decisions; profit margin is used for pricing and financial reporting. To find the sales volume where a business investment first turns profitable, the point at which ROI turns positive, the Break Even Point Calculator shows that threshold in units and revenue.
References
- Return on Investment (ROI), Investopedia: formula, worked examples, and comparison with IRR and net present value.
- Cash-on-Cash Return, Investopedia: how cash-on-cash ROI is used in real estate and why it differs from total ROI on a leveraged property.
- Compound Annual Growth Rate (CAGR), Investopedia: how CAGR (annualized ROI) is calculated and why it is used to compare investments held for different lengths of time.