How to Calculate ROI: Return on Investment Guide
Return on Investment (ROI) is a performance metric that measures the gain or loss generated by an investment relative to its cost. The formula is simple: ROI = (Net Profit / Cost of Investment) × 100. An ROI of 30% means you earned $0.30 for every $1 invested. ROI is used universally across finance, marketing, real estate, and business to evaluate whether an investment is worth making.
Quick Answer
- *According to Fidelity, the S&P 500 has delivered an average annual ROI of approximately 10.68% since 1957 (with dividends reinvested).
- *According to the Federal Housing Finance Agency, U.S. housing prices have increased an average of 5.4% per year between 1992 and 2024.
- *According to the Corporate Finance Institute, the ROI formula is the most commonly used metric for evaluating business investments due to its simplicity.
- *After inflation, the S&P 500’s real average annual return drops to approximately 6.80%.
The Basic ROI Formula
ROI = (Net Profit / Cost of Investment) × 100
Where:
- Net Profit = Final Value − Cost of Investment
- Cost of Investment = Total amount spent
Example: Stock Investment
You buy $10,000 of stock. A year later, it is worth $12,500. You also received $300 in dividends.
Net Profit = ($12,500 + $300) − $10,000 = $2,800
ROI = ($2,800 / $10,000) × 100 = 28%
Example: Marketing Campaign
You spend $5,000 on an ad campaign that generates $22,000 in revenue.
Net Profit = $22,000 − $5,000 = $17,000
ROI = ($17,000 / $5,000) × 100 = 340%
This is a 4.4:1 return ($4.40 earned per $1 spent).
Annualized ROI: Comparing Investments of Different Lengths
Basic ROI does not account for time. An investment that returns 50% over 1 year is much better than one that returns 50% over 10 years. Annualized ROI converts total return into a per-year rate:
Annualized ROI = [(1 + ROI)^(1/n) − 1] × 100
Where n = number of years.
| Investment | Total ROI | Years Held | Annualized ROI |
|---|---|---|---|
| Stock A | 50% | 3 years | 14.5% |
| Stock B | 80% | 7 years | 8.8% |
| Real Estate | 120% | 10 years | 8.2% |
| Business | 200% | 5 years | 24.6% |
Despite having a lower total ROI, Stock A (14.5% annualized) outperformed Stock B (8.8% annualized) on a per-year basis. Always compare annualized returns when evaluating investments of different time horizons.
Average ROI Benchmarks by Asset Class
| Asset Class | Average Annual ROI | Source |
|---|---|---|
| U.S. Stocks (S&P 500) | 10.68% | Fidelity (1957–2025) |
| U.S. Stocks (inflation-adjusted) | 6.80% | Fidelity (1957–2025) |
| U.S. Real Estate | 5.4% | FHFA (1992–2024) |
| U.S. Bonds (aggregate) | 3–5% | Historical average |
| High-Yield Savings | 4–5% | Current rates (2026) |
| Gold | ~7% | World Gold Council (50-year avg) |
ROI for Real Estate Investments
Real estate ROI is more nuanced because you must account for rental income, appreciation, expenses, and leverage (mortgage). Here is how to calculate it:
Example: Rental Property
Purchase price: $300,000 (put $60,000 down, mortgage the rest)
Annual rental income: $24,000
Annual expenses (mortgage, taxes, insurance, maintenance): $18,000
Annual net cash flow: $6,000
Cash-on-cash ROI = ($6,000 / $60,000) × 100 = 10%
This 10% return is on the cash you invested ($60,000), not the property value ($300,000). Leverage amplifies both gains and losses in real estate. If the property also appreciates 4% per year ($12,000), your total return on the $60,000 investment is 30% — but this comes with mortgage risk.
ROI for Business and Marketing
Marketing ROI
Marketing ROI measures the effectiveness of campaigns:
Marketing ROI = (Revenue from Campaign − Cost of Campaign) / Cost of Campaign × 100
| Channel | Cost | Revenue | ROI |
|---|---|---|---|
| Google Ads | $3,000 | $12,000 | 300% |
| Email Marketing | $500 | $4,200 | 740% |
| Social Media Ads | $2,000 | $5,500 | 175% |
| Content Marketing | $4,000 | $9,000 | 125% |
Limitations of ROI
- Ignores time: Basic ROI does not factor in how long the investment takes. Always use annualized ROI for comparisons.
- Ignores risk: A 15% ROI from a savings account and a 15% ROI from crypto are not equivalent — the risk profiles are vastly different.
- Ignores cash flow timing: ROI treats all returns as a lump sum. An investment that returns $100/month for 12 months is better than one that returns $1,200 after 12 months (due to reinvestment potential).
- Can be manipulated: By changing what counts as “cost,” ROI calculations can be inflated or deflated. Always clarify what is included.
For a deeper look at how investments grow over time, see our compound interest guide.
Quickly calculate any investment’s ROI
Use our free ROI Calculator →Also useful: Investment Calculator · Beginner’s Investing Guide
Frequently Asked Questions
What is a good ROI?
A “good” ROI depends on the asset class. For stocks, the S&P 500’s 10% average annual return is a common benchmark. Real estate typically returns 5–10% annually. Marketing campaigns often target 5:1 return (400% ROI). Any ROI above your cost of capital is generally considered positive.
How do you calculate ROI?
ROI = (Net Profit / Cost of Investment) × 100. If you invest $10,000 and it grows to $13,000, your net profit is $3,000. ROI = ($3,000 / $10,000) × 100 = 30%. For different time periods, use annualized ROI.
What is the difference between ROI and annualized ROI?
ROI measures total return over the entire holding period. Annualized ROI converts it to a per-year rate. An investment returning 50% over 5 years has a 50% total ROI but only 8.45% annualized ROI. Use annualized ROI to compare investments of different durations.
Can ROI be negative?
Yes, ROI is negative when you lose money. If you invest $10,000 and it drops to $7,000, your ROI is -30%. A negative ROI means the investment lost money relative to its cost.