What Is ROI?
ROI (Return on Investment) measures the profitability of an investment relative to its cost. It's one of the most universally used metrics for evaluating business decisions, stock picks, real estate, and marketing spend.
ROI = (Net Profit ÷ Investment Cost) × 100%
Net Profit = Final Value − Initial Investment
ROI Calculation Examples
- Stock investment: Buy for $10,000, sell for $13,500 after 1 year
ROI = ($13,500 − $10,000) ÷ $10,000 × 100% = 35% - Ad campaign: Spend $5,000, generate $18,000 revenue with $10,000 in product costs
Net profit = $18,000 − $10,000 − $5,000 = $3,000; ROI = $3,000 ÷ $5,000 = 60%
ROI vs Annualized Return (CAGR)
ROI ignores time — the same ROI over different periods means very different things:
| Investment | Total ROI | Duration | Annualized (CAGR) |
|---|---|---|---|
| Investment A | 50% | 2 years | ~22.5%/year |
| Investment B | 50% | 5 years | ~8.4%/year |
When comparing investments of different durations, always use annualized ROI (CAGR) for a fair comparison.
Annualized ROI Formula (CAGR)
CAGR = (Final Value ÷ Initial Investment)^(1/Years) − 1
Use tool.tl's ROI calculator to calculate both total ROI and annualized CAGR simultaneously.
Limitations of ROI
- Ignores risk: Two investments with identical ROI may have vastly different risk profiles — ROI alone doesn't capture this
- Ignores cash flow timing: Receiving returns upfront vs over 5 years has very different present values
- Ignores opportunity cost: A positive ROI doesn't mean it was the best use of capital — compare against alternative investments
ROI Benchmarks by Investment Type
| Investment Type | Typical Annual ROI |
|---|---|
| Savings account / CD | 1% – 5% |
| Bonds / bond funds | 3% – 6% |
| Stock index funds (long-term) | 7% – 10% |
| Real estate (rental yield) | 4% – 8% |
| Private equity / venture capital | 15% – 30% (high risk) |
Frequently Asked Questions
What's a good ROI?
It depends on context and risk. The risk-free rate (government bond yield, ~4–5% currently) is the minimum threshold — any investment should beat it. The long-term stock market average (~8–10% annually) is a common benchmark for equity investments.
What does a negative ROI mean?
Negative ROI means you lost money — the final value is less than your initial investment. For example, investing $10,000 and getting back $8,000 gives an ROI of −20%.
Is the calculator free?
Yes — tool.tl's ROI calculator is completely free and shows both total ROI and annualized CAGR. No account required.