ROI (Return on Investment) measures how much you gained relative to what you put in. It's expressed as a percentage and works across nearly every type of investment. The formula: ROI = (Net Gain / Cost) × 100.
ROI Formula and Examples
- •Stock: Buy $10,000 of Apple, sell for $13,500 → ROI = ($3,500 / $10,000) × 100 = 35%
- •Rental property: Buy for $200,000, annual net rent $12,000 → ROI = ($12,000 / $200,000) × 100 = 6%
- •Business investment: Spend $5,000 on ads, generate $18,000 revenue, $8,000 costs → ROI = ($5,000 / $5,000) × 100 = 100%
- •Education: MBA costs $80,000, salary increase $20,000/year → ROI = ($20,000 / $80,000) × 100 = 25%/year
What's a Good ROI?
- •S&P 500 long-term average: ~10% annual return (7% inflation-adjusted)
- •Real estate (cash-on-cash): 6–12% considered good
- •Business investment: 15–30%+ expected to justify risk
- •Savings account / CD: 4–5% (current rates); risk-free baseline
- •Rule of thumb: ROI should exceed your cost of capital (what you're borrowing at) by at least 2–3%
ROI Limitations
- •Ignores time: A 50% ROI over 10 years is worse than 50% over 2 years. Use annualized ROI or CAGR for comparisons
- •Ignores risk: Higher ROI often means higher risk. Adjust for volatility (Sharpe ratio)
- •Ignores taxes: A 20% return on a taxable account may net less than a 15% return in a Roth IRA
- •Cash flow timing matters: When you receive returns affects the true value (time value of money)
For comparing investments over different time horizons, use annualized ROI (CAGR): CAGR = (Ending Value / Beginning Value)^(1/years) – 1. A 100% ROI over 10 years is only a 7.2% CAGR — barely beating inflation.