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Return on investment (ROI) measures a return against the amount invested. A common formula is ROI = (total proceeds − total cost) ÷ total cost × 100. For example, if an investment costs $1,000 and later produces $1,200 in proceeds, its ROI is 20%: ($1,200 − $1,000) ÷ $1,000 × 100. That percentage is meaningful only when you define the costs, proceeds, and period included.
How to calculate ROI
For a straightforward investment, subtract the total cost from total proceeds, divide the gain by the total cost, and multiply by 100 to express the result as a percentage. Fidelity describes total cost as including extra fees and says proceeds can include income such as bond interest. Its examples illustrate the calculation; they are not forecasts.
Fidelity’s ROI explanation uses 100 shares bought for $2,000 and valued at $2,600. The $600 gain divided by $2,000 gives a 30% ROI before fees. For a stock, include dividends as well as price change and include trading costs in the investment cost. Fidelity’s one-share example buys at $50, ends at $60, and includes a $2 dividend: ($60 − $50 + $2) ÷ $50 = 24%, before taxes owed.
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For any calculation, state what counts as the investment and return. A result can change if you leave out fees, maintenance, taxes, or other relevant costs, or if you use a different invested-capital base.
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How to compare ROI across different periods
A simple ROI is a total return for a particular holding period; it does not say how long the investment took to produce that return. A 25% return over a short period is not equivalent to 25% over several years. For a single beginning value and ending value, annualized ROI expresses the equivalent compounded yearly rate:
Annualized ROI = (ending value ÷ beginning value)^(1 ÷ number of years) − 1
CFI’s ROI guide gives an example in which an ordinary return of 21.6% over part of a year corresponds to an annualized return of 35.5%. These answer different questions: one is the total result over the holding period, the other is the equivalent yearly rate.
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If there are multiple contributions or withdrawals on different dates, a single beginning-to-ending calculation may not represent the cash-flow pattern. Internal rate of return (IRR) accounts for the timing of dated cash flows and may be more useful for that comparison.
ROI in managerial accounting
In business accounting, ROI can use a different denominator from an investor’s purchase cost. OpenStax defines managerial ROI as income divided by average capital assets and decomposes it into sales margin multiplied by asset turnover:
ROI = (income ÷ sales revenue) × (sales revenue ÷ average capital assets)
The sales-revenue terms cancel, leaving income ÷ average capital assets. The decomposition shows two ways a business can generate ROI: earn more income per sales dollar (higher margin) or generate more sales per dollar of average assets (faster asset turnover). See OpenStax’s managerial accounting discussion of ROI.
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The denominator needs to be disclosed. Invested capital may mean fixed, productive, or operating assets, and gross versus net book value also changes the result. OpenStax’s bakery division figures—35%, 42%, and 27%—are classroom illustrations calculated as income divided by average capital assets, not industry benchmarks.
Accounting rate of return is a related but distinct use
ACCA uses “accounting rate of return,” also called ROI, for annual accounting profit as a percentage of investment. The same project in its example produces 20% using initial investment as the denominator and 36% using average investment. Because this method is based on profit rather than cash flow, it does not account for cash-flow timing or the time value of money. ACCA’s investment-appraisal explanation discusses that distinction.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What counts as a good ROI?
There is no universal percentage that makes an ROI good. The relevant comparison depends on the objective, asset type, holding period, and risk. CFI uses 8% as an illustration that might exceed expectations for fixed income but fall short for a high-growth venture; it is not a current market standard. Riskier investments may offer higher potential ROI, but that does not guarantee higher realized returns.
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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchWhen comparing alternatives, put the calculations on consistent footing:
- Use the same period, or compare annualized returns.
- Treat fees, income, and other costs consistently.
- Use comparable definitions of invested capital.
- Consider risk, financing costs, and the timing of cash flows.
Leverage can raise ROI by reducing the personal capital used, but it also magnifies losses if performance falls short. A useful comparison should show the financed and cash-funded cases separately and include borrowing costs rather than treating borrowed money as costless.
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What ROI does not tell you
- How long the return took: Simple ROI is not a time-based rate. Annualize single start-and-end investments when comparing periods.
- When interim cash flows occurred: Total ROI can conceal the timing of contributions and distributions; IRR is one alternative for dated cash flows.
- How risky the investment is: ROI measures return, not risk. A high percentage alone does not show the chance or scale of losses.
- Whether the calculation includes every relevant cost: Omitting such items as maintenance, taxes, sale fees, or legal costs can make a result look stronger than it is.
- Whether profit equals cash available: Accounting rate of return uses accounting profit and can overlook cash-flow timing and the time value of money. For project appraisal where these matter, NPV or IRR may provide a more suitable comparison.
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