The core formula
A 25% total ROI earned over five years is not comparable with a 25% ROI in one year. For a positive beginning and ending value, the geometric annualized return is (ending value ÷ total invested cost)^(1 ÷ years) − 1. This assumes no interim cash flows.
Worked example
$12,000 final value from a $10,000 investment = 20% ROI.
How to calculate ROI
- Define the investment cost, including fees or other amounts you want the comparison to reflect.
- Calculate gain as final value or proceeds minus investment cost.
- Divide gain by investment cost and multiply by 100.
- Keep the time horizon visible because the same ROI over one year and five years describes very different performance.
ROI is a total-period ratio unless you annualize it
ROI is useful because it relates gain to the amount invested, but the basic formula contains no time variable. A 20% ROI does not tell you whether the gain took three months or five years.
For investments with multiple cash flows, changing capital balances or long time horizons, more advanced measures such as annualized return or internal rate of return may be more appropriate.
Common mistakes
- Comparing total-period ROI values from very different time horizons.
- Leaving material fees out of the investment cost.
- Using revenue as gain without subtracting the relevant costs.
Compare returns over a meaningful holding period
A 25% total ROI earned over five years is not comparable with a 25% ROI in one year. For a positive beginning and ending value, the geometric annualized return is (ending value ÷ total invested cost)^(1 ÷ years) − 1. This assumes no interim cash flows.
Account for costs and cash flows
Add transaction fees, maintenance and other attributable costs to invested capital, and account for distributions consistently. If there are irregular deposits or withdrawals, a simple annualized ROI can mislead; a cash-flow-based IRR or XIRR method is usually more appropriate.
Frequently asked questions
Is ROI an annual return?
Not by default. Basic ROI is a total-period return unless it is explicitly annualized.
Can ROI be negative?
Yes. If the ending value or gain is below the investment cost, ROI is negative.
Is ROI the same as ROAS?
No. ROAS compares attributed revenue with ad spend; ROI compares net gain with investment cost.
What should I verify about account for costs and cash flows?
Add transaction fees, maintenance and other attributable costs to invested capital, and account for distributions consistently. If there are irregular deposits or withdrawals, a simple annualized ROI can mislead; a cash-flow-based IRR or XIRR method is usually more appropriate.