What is ROI?

Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures how much return you receive compared to the cost of the investment, expressed as a percentage.

ROI Formula

Or alternatively:

Annualized ROI

When comparing investments of different durations, annualized ROI provides a standardized measure:

Why ROI Matters

• Compare Investments: Evaluate different investment opportunities
• Decision Making: Determine if an investment is worth pursuing
• Performance Tracking: Measure how well investments are performing
• Resource Allocation: Decide where to allocate capital

Types of ROI

• Simple ROI: Basic calculation without considering time
• Annualized ROI: Standardized to a yearly rate
• Risk-Adjusted ROI: Accounts for investment risk (Sharpe ratio)
• Social ROI: Measures social/environmental impact

Limitations of ROI

• Doesn't account for time value of money (use NPV/IRR for that)
• Doesn't consider risk level of investments
• Can be manipulated by changing what costs are included
• Different calculation methods can yield different results

Good ROI Benchmarks

• Stock Market (S&P 500): ~10% average annual return
• Real Estate: 8-12% annual return
• Business Projects: Often expect 15%+ ROI
• Marketing Campaigns: 5:1 return ($5 for every $1 spent)