How to Calculate ROI (Return on Investment)

Return on investment measures how much you gained relative to what you put in. The formula is: ROI = (net gain / cost of investment) x 100, expressed as a percentage. If you invest $1,000 and end with $1,250, your net gain is $250 and your ROI is 25%.

Its appeal is simplicity — one number that works for stocks, a marketing campaign, a rental property, or a course. Its weakness is that same simplicity: a bare ROI ignores how long the money was tied up and how much risk you took to get it.

A 25% return is excellent in one year and mediocre over ten. To compare fairly, convert to annualized ROI, which expresses the return as an equivalent yearly rate accounting for compounding: annualized ROI = (ending / beginning) ^ (1 / years) - 1.

That same $1,000 to $1,250 is 25% over one year (great) but only about 2.3% per year if it took ten years to get there. Always annualize before comparing two investments held for different lengths of time.

Whether by hand or with a calculator, the inputs are the same.

ROI says nothing about risk. A 40% return from a volatile bet and a 40% return from a steady one look identical on paper but are very different decisions. It also ignores opportunity cost — what the same money could have earned elsewhere — and, for long holds, the effect of inflation on the real value of your gain.

Treat ROI as the starting question, not the final answer: pair it with the time frame, the risk, and the alternatives before deciding whether a return is actually good.