How to Calculate ROI (Return on Investment): Formula and Real Examples
Short answer
ROI = (what you got back β what you put in) Γ· what you put in Γ 100. Example: you spend $250 fixing up a used bike and sell it for $340. Your profit is $90, and 90 Γ· 250 = 0.36, so the ROI is 36%. To compare investments that last different lengths of time, convert the result to a yearly (annualized) ROI.
Return on investment, or ROI, answers one simple question: for every dollar I put in, how much did I get back? It is the number small business owners use to judge an ad campaign, resellers use to decide whether a flip was worth it, and investors use to compare one option with another. The maths takes a minute, but a few common mistakes can make a poor deal look great. This guide walks through the formula, three everyday examples and the traps to avoid. It is general information, not financial advice.
The ROI formula in plain words
ROI compares your net profit with your total cost:
ROI (%) = (final value β total cost) Γ· total cost Γ 100
"Total cost" means everything you had to spend to get the result: the purchase price, fees, shipping, repairs, commissions and any other money that left your pocket. "Final value" is what you ended up with: the sale price, the extra profit, or the current value of an investment. A positive ROI means you made money; a negative ROI means you lost some. Our free ROI calculator does the arithmetic for you, and the percentage calculator is handy for quick checks.
Example 1: flipping a used bike
Say you buy a second-hand bike for $200, spend $50 on new tyres and brake pads, and sell it for $340.
- Total cost: $200 + $50 = $250
- Net profit: $340 β $250 = $90
- ROI: 90 Γ· 250 = 0.36, or 36%
If the bike had sold for only $230, the result would be (230 β 250) Γ· 250 = β0.08, a β8% ROI. Seeing a loss as a clear percentage makes it easier to decide whether the next flip is worth your weekend.
Example 2: a small ad campaign (and the most common mistake)
A home baker spends $500 on social media ads and the campaign brings in $2,000 of extra sales. It is tempting to write (2,000 β 500) Γ· 500 = 300% ROI. That is wrong, because the $2,000 is revenue, not profit. Ingredients, boxes and delivery still had to be paid for.
If the baker keeps 40% of each sale as gross profit, the campaign really produced $2,000 Γ 40% = $800 of profit. The correct ROI is (800 β 500) Γ· 500 = 60%. Still a good result, but five times smaller than the first guess. If you are not sure what your margin is, our guide to profit margin vs markup and the profit margin calculator will help, and the break-even guide shows how many sales you need before a campaign pays for itself.
Example 3: comparing two investments over different lengths of time
Plain ROI ignores time, and that can mislead you. Compare two options, each starting with $10,000:
- Option A grows to $13,000 in 3 years: ROI = 3,000 Γ· 10,000 = 30%.
- Option B grows to $12,500 in 2 years: ROI = 2,500 Γ· 10,000 = 25%.
A looks better at first glance, but it took a year longer. To compare fairly, convert each to an annualized ROI, the steady yearly growth rate that gives the same result:
Annualized ROI = (final value Γ· starting value)1 Γ· years β 1
- Option A: 1.301/3 β 1 β 9.1% a year
- Option B: 1.251/2 β 1 β 11.8% a year
Per year, Option B wins. This is the same idea as compound growth; you can test different rates and time spans on the compound interest calculator. For a quick mental check, the rule of 72 says money growing at about 9% a year doubles in roughly 72 Γ· 9 = 8 years.
Don't forget inflation
A 9.1% yearly return sounds strong, but if prices rose 3% a year over the same period, your real gain in buying power is smaller: 1.091 Γ· 1.03 β 1 β 6% a year. The inflation calculator shows how much a sum of money from an earlier year is worth today, which helps you judge whether a "good" return actually kept ahead of rising prices.
Five mistakes that make ROI look better than it is
- Using revenue instead of profit. As the bakery example shows, this can inflate ROI several times over.
- Leaving out costs. Platform fees, shipping, transaction charges, taxes and repairs all belong in the cost.
- Ignoring time. 20% over five years is far weaker than 20% in one year. Use annualized ROI for comparisons.
- Ignoring risk. Two options with the same expected ROI are not equal if one could lose half its value. ROI measures results, not safety.
- Counting your time as free. If a flip earned $90 but took 10 hours, that is $9 an hour. Sometimes the honest question is whether the hours were worth it.
ROI beyond money
The same thinking works for everyday decisions. Is a certification exam worth its fee if it leads to a raise? Is a pricier direct flight worth it if it saves a day of holiday? Put rough numbers on both sides and the answer often becomes clear. Our exams hub and study guides list fees and dates for popular tests, and the flights hub makes it easy to compare fares before you book. For more money tools, browse the full tools list, or read how to work out a percentage increase.
VSH take: most people who say a project "paid off" have only looked at the money that came in. The habit worth building is writing down every cost before you start, then checking ROI per year at the end. It takes five minutes and stops a lot of expensive repeats.
General information only, not financial advice. Updated 20 October 2026. Examples use round, made-up numbers for illustration.
Frequently asked questions
What is a good ROI?
It depends on the time frame and the risk. For a one-off project, any ROI comfortably above what a savings account would pay over the same period is a reasonable starting point. For investments, compare annualized ROI with other options of similar risk rather than looking for a single magic number.
Can ROI be negative?
Yes. If the final value is lower than the total cost, ROI is negative. Spending $1,000 and getting back $850 gives (850 β 1,000) Γ· 1,000 = β15%.
What is the difference between ROI and profit margin?
ROI compares profit with the money you invested. Profit margin compares profit with the selling price. A $90 profit on a $250 cost and a $340 sale is a 36% ROI but about a 26% margin.
How do I calculate annualized ROI?
Divide the final value by the starting value, raise the result to the power of 1 divided by the number of years, then subtract 1. For $10,000 growing to $13,000 in 3 years: 1.3 to the power of 1/3, minus 1, is about 9.1% a year.
Should fees and taxes be included in ROI?
Yes. Include every cost you paid to get the return, such as purchase fees, commissions, shipping and taxes. Leaving them out makes the ROI look better than it really is.
