What is ROI (Return on Investment)?
Return on Investment (ROI) is one of the most widely used financial metrics to evaluate the profitability and efficiency of an investment. It measures the gain or loss generated relative to the amount invested, expressed as a percentage. ROI helps investors, business owners, and financial analysts make informed decisions by providing a simple way to compare the profitability of different investments. Whether you're evaluating stocks, real estate, business projects, or marketing campaigns, ROI gives you a clear picture of your returns. The beauty of ROI lies in its simplicity—it can be applied to virtually any type of investment and provides an easy-to-understand percentage that shows how much you've gained (or lost) on your investment.
ROI Formula
How to use this calculator
- Enter your initial investment amount—this is the total capital you put in
- Enter the final value—what your investment is worth now or when you sold it
- View your ROI percentage instantly calculated, along with absolute profit/loss
When Should You Use ROI?
- Comparing multiple investment opportunities to determine which offers better returns
- Evaluating the success of a marketing campaign or business initiative
- Assessing real estate investments including rental properties and flips
- Measuring the effectiveness of capital expenditures in your business
- Tracking the performance of your stock portfolio over time
- Making data-driven decisions about where to allocate resources
Real-World Examples
Stock Investment Example
You invested ₹1,00,000 in stocks and after 2 years, your portfolio is worth ₹1,50,000.
💡 Your investment grew by 50%, but remember this is total return, not annualized. For time-adjusted returns, use CAGR.
Real Estate Example
You bought a property for ₹50,00,000 and sold it for ₹62,00,000 after 3 years.
💡 A 24% ROI over 3 years equals roughly 7.5% per year. Consider additional costs like maintenance, taxes, and transaction fees for a more accurate picture.
Business Marketing Example
You spent ₹2,00,000 on a digital marketing campaign that generated ₹6,00,000 in sales.
💡 A 200% ROI means you earned ₹2 for every ₹1 spent. This is an excellent return for marketing spend.
ROI vs Other Return Metrics
Understanding when to use ROI versus other metrics helps you make better investment decisions.
| Feature | ROI | CAGR | IRR |
|---|---|---|---|
| Time Factor | No | Yes | Yes |
| Complexity | Simple | Moderate | Complex |
| Best For | Quick comparison | Long-term growth | Cash flow analysis |
| Accounts for Compounding | No | Yes | Yes |
| Multiple Cash Flows | No | No | Yes |
Common ROI Calculation Errors (And How to Avoid Them)
Ignoring transaction costs and taxes in calculations
The Issue:Brokerage, STT, and capital gains tax can reduce actual ROI by 1-3%
Comparing ROI across different time periods
The Issue:50% ROI over 5 years is mathematically different from 50% over 1 year
Not accounting for opportunity cost in analysis
The Issue:A 8% ROI might seem good, but not if FDs are giving 7% risk-free
Pro Tips for Using ROI
Limitations of ROI
While ROI is powerful, it has limitations. It doesn't account for the time value of money, risk, or holding period. A 50% ROI over 10 years is very different from 50% over 1 year. For more sophisticated analysis, consider using CAGR for time-adjusted returns or IRR for projects with multiple cash flows.
Frequently Asked Questions
What is considered a good ROI?
A 'good' ROI depends on the investment type and risk level. Stock market historically returns 10-12% annually. Real estate typically yields 8-12%.
Does ROI account for time?
No, basic ROI does not factor in time. A 50% ROI over 1 year is far better than 50% over 10 years. For time-adjusted returns, use CAGR (Compound Annual Growth Rate) which annualizes the return and accounts for compounding.
Can ROI be negative?
Yes, a negative ROI indicates a loss on your investment—you received less than you invested. For example, if you invest ₹1,00,000 and get back ₹80,000, your ROI is -20%. This is common in volatile markets or failed business ventures.
How is ROI different from profit?
Profit is the absolute amount you gained (Final Value - Investment), while ROI expresses this gain as a percentage of your original investment. ROI is more useful for comparing investments of different sizes. ₹50,000 profit on a ₹1,00,000 investment (50% ROI) is better than ₹50,000 profit on ₹10,00,000 (5% ROI).
Should I include taxes in ROI calculation?
For accurate decision-making, yes. Pre-tax ROI shows gross returns, but post-tax ROI reflects what you actually keep. In India, consider capital gains tax (12.5% for long-term equity, 20% for real estate with indexation) when calculating your true returns.