How to Calculate ROI (Return on Investment)? A Complete Guide to the Core Formula and Practical Applications of Investment Returns

Why Should You Understand Return on Investment (ROI)? Three Real-Life Cases

Imagine you have 100,000 dollars to invest. Your friend A invests 100,000 in stocks, and after one year, it becomes 120,000; friend B also invests 100,000 in CFD contracts, and after one year, it becomes 125,000. At first glance, B seems to earn more, but if you’re told that B spent more effort monitoring the market and endured greater volatility, would you still envy?

This is the value of ROI — it helps you see the true return capability of every dollar.

What Exactly Is ROI?

Return on Investment (ROI) is a core indicator measuring the efficiency of making money from an investment, expressed as a percentage. Simply put, it’s the ratio of your net profit to your initial investment.

Whether it’s personal investing, corporate decisions, or advertising campaigns, ROI can be measured with a formula: whether you used your money wisely.

The Simplest and Rough Calculation Method

ROI = (Money Earned - Money Spent) ÷ Initial Investment × 100%

For example:

• Investment: $1,000,000 in stocks
• Sale: $1,300,000
• ROI = (1300000 - 1000000) ÷ 1000000 × 100% = 30%

But real-world investing isn’t that simple. Stocks require accounting for dividends and transaction fees; real estate involves taxes and maintenance costs; business profits need to distinguish gross profit from net profit. So, let’s look at how to accurately calculate ROI for different types of investments.

Stock Investment: Don’t Forget the Hidden Costs

Suppose you:

• Spend $10 per share to buy 1,000 shares = $10,000 invested
• After one year, sell at $12.5 per share
• Receive $500 in dividends
• Pay $125 in transaction fees

Calculation logic:

• Total income = 12.5×1000 + 500 = $13,000
• Total costs = 10×1000 + 125 = $10,125
• Net profit = $13,000 - $10,125 = $2,875
• ROI = $2,875 ÷ $10,000 × 100% = 28.75%

Key point: Don’t just look at the buy-sell difference; transaction costs, taxes, and opportunity costs must be included.

ROI vs. ROAS in Advertising: Easy to Confuse

E-commerce friends often say, “My ad ROI is 200%,” but what they’re actually referring to is usually ROAS.

Advertising ROI calculation: Investment return = (Sales Revenue - Total Cost of Goods) ÷ Total Cost of Goods

ROAS calculation:
ROAS = Sales Revenue ÷ Advertising Spend

Using the same example: cost of goods $100, selling price $300, 10 units sold, $500 advertising cost

• ROI = (3000 - 1500) ÷ 1500 × 100% = 100% (considering all costs)
• ROAS = 3000 ÷ 500 × 100% = 600% (only considering ad spend)

Difference: ROI measures profit, ROAS measures revenue. ROAS looks impressive, but ROI reflects true profitability.

The Time Factor: Annualized ROI for True Comparison

This is a common pitfall — ROI without considering time is meaningless.

Project A: earns 100% in 2 years
Project B: earns 200% in 4 years

At first glance, B seems better, but annualized ROI calculation shows:

Annualized ROI = [(Total Return + 1)^(1/Years) - 1] × 100%

• Project A: [(1+1)^(1/2) - 1] × 100% = 41.4%
• Project B: [(2+1)^(1/4) - 1] × 100% = 31.6%

Investing in A is more cost-effective. Time is a decisive factor, and the power of compound interest is evident here.

The Three Financial Ratios Used by Companies: ROI, ROA, ROE

These three metrics are often confused but serve different purposes:

Example: A company with assets of $1 million (including $500,000 debt and $500,000 equity), and a project investing $100,000 earning $200,000:

• ROI = (200,000 - 100,000) ÷ 100,000 = 100%
• Annual net profit = $1.5 million, ROA = 150 ÷ 100 = 150%
• ROE = 150 ÷ 50 = 300% (most attractive to shareholders)

What ROI Is Considered Good? Cross-Comparison of Different Investments

Generally, the annualized ROI ranking is:

Crypto & Forex > Stocks > Indexes & Funds > Bonds

But high ROI equals high risk — this is an iron law. For example:

Suppose a certain cryptocurrency rises 300% in a year, while a blue-chip stock rises 15%. Based solely on ROI, crypto wins. But if the crypto’s volatility is 7 times that of stocks, your actual risk is also 7 times higher. Smart investors adjust their position sizes based on volatility.

If crypto volatility: stock volatility = 7:3, then allocate positions inversely proportional (3:7) to balance risk and return.

Common High-ROI Investment Methods

1. CFD Contracts for Difference

Leverage and low margin are attractive. With a $100,000 capital, CFD trading might only require 20% margin, i.e., $20,000. If you profit $500, your ROI jumps to 25%. Favored by short-term traders.

2. Forex Margin Trading

The largest global market, 24-hour trading, sometimes yields annualized ROI over 30%. But risks are high: currency fluctuations are heavily influenced by international politics and economics, requiring high experience. Strict stop-loss and take-profit are essential.

3. Gold Investment

Strong hedging and preservation properties. In 2019, international gold prices rose 18.4%, hitting an 8-year high. During economic uncertainty, gold often becomes a safe haven.

4. Stock Investment

The most mature market. Over 200 years of US stock market data shows an average annual ROI exceeding 12%. Low valuation, high dividends, and policy benefits make it a conservative investor’s favorite.

Four Pitfalls You Might Have Fallen Into

Pitfall 1: Only look at numbers, ignore the time dimension

Project X’s ROI is 25%, Project Y’s is 15%. But if X takes 5 years and Y only 1 year, the conclusion flips. Always compare using annualized ROI.

Pitfall 2: High ROI often means high risk

Some assets show astonishing ROI but have terrifying volatility. Chasing high ROI blindly might lead to losses in the first year and force you to exit.

Pitfall 3: Forgetting hidden costs in calculations

Real estate investments forget to include mortgage interest, taxes, and maintenance, leading to an overestimated ROI. Stocks forget transaction fees and taxes, making returns appear inflated. List all possible costs before calculating.

Pitfall 4: ROI only measures financial gains

Invisible benefits like social impact and environmental sustainability are often overlooked, undervaluing certain projects’ true worth. This is why later, people invented the “Social Return on Investment” (SROI) metric.

Final Advice

ROI is a reference for investment decisions, not the sole criterion. Reasonable ROI expectations depend on your risk tolerance, capital size, investment horizon, and market environment.

Remember this logic: To increase ROI, either boost profits or cut costs. But in practice, choosing high-ROI assets directly is often more effective than squeezing tiny margins — as long as you can bear the risk.

Focus on annualized ROI, consider volatility, and evaluate hidden costs carefully — this way, you won’t be fooled by superficial ROI figures.