Return on Investment is the most universal metric in finance. It measures how much profit an investment generates relative to its cost. Whether you are evaluating a stock portfolio, a rental property, a marketing campaign, or a business expansion, ROI provides a standardized way to compare alternatives.
The Basic ROI Formula
ROI = (Net Profit / Total Investment) × 100 If you invest $10,000 and receive $13,000 back, your net profit is $3,000 and your ROI is 30%.
Simple ROI vs CAGR
Simple ROI does not account for time. A 30% return over 1 year is excellent; over 10 years it is mediocre. For multi-year investments, use CAGR (Compound Annual Growth Rate) to annualize returns.
CAGR = (Ending Value / Beginning Value)^(1/years) − 1 A $10,000 investment that grows to $13,000 in 3 years has a CAGR of 9.1%, not 30%.
| Metric | Best For | Limitation |
|---|---|---|
| Simple ROI | Quick comparison of total returns | Ignores time horizon |
| CAGR | Annualized multi-year performance | Assumes smooth growth |
| IRR | Investments with irregular cash flows | Can have multiple solutions |
Calculate all three metrics with the ROI Calculator.
Common ROI Pitfalls
- Ignoring all costs. Include taxes, fees, maintenance, and opportunity cost.
- Comparing different time periods. A 50% ROI over 5 years (8.4% CAGR) is worse than 40% over 3 years (11.9% CAGR).
- Ignoring inflation. A 7% nominal return with 3% inflation is only a 4% real return.
- Survivorship bias. Looking only at successful investments overstates expected ROI.
Key Takeaways
- ROI = Net Profit / Investment × 100 — universal but time-blind.
- Use CAGR for multi-year investments to get an honest annualized return.
- Include ALL costs — taxes, fees, opportunity cost, and inflation.
- Always compare on the same time basis using annualized returns.
Frequently Asked Questions
What is a good ROI?
It depends on the asset class. The S&P 500 has returned about 10% annually (7% after inflation). Real estate typically returns 8-12%. Any investment consistently above 10% CAGR is performing well.
How do I calculate ROI on a rental property?
Include all income (rent, appreciation) minus all costs (mortgage, taxes, insurance, maintenance, vacancies). Divide net profit by total cash invested (down payment + closing costs + repairs). Use the Cap Rate calculator for quick analysis.
Does ROI include inflation?
Standard ROI is nominal (does not account for inflation). To calculate real ROI, subtract the inflation rate from your nominal return, or use the Fisher equation: Real Return = (1 + Nominal) / (1 + Inflation) - 1.