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ROI

Investment

Return on Investment

A performance metric that measures the gain or loss from an investment relative to its cost, expressed as a percentage.

Definition

Return on Investment (ROI) is a fundamental financial metric that measures the profitability of an investment relative to its cost. It expresses the net gain (or loss) from an investment as a percentage of the initial cost, making it easy to compare the efficiency of different investments.

ROI is used across investing, business analysis, real estate, and marketing to evaluate whether an investment has been worthwhile. Its simplicity is both its strength and its weakness — it is quick to calculate but does not account for the time value of money or the duration of the investment.

For time-adjusted performance measurement, CAGR (single cash flow) or XIRR (multiple cash flows) is more appropriate.

Formula

ROI = (Net Gain / Cost of Investment) × 100

Where: Net Gain = Final Value of Investment − Cost of Investment

So: ROI = ((Final Value − Cost) / Cost) × 100

Worked Example

You bought 100 shares of a company at ₹500 each (total cost = ₹50,000). Two years later, you sell them at ₹750 each (total receipts = ₹75,000). You also received dividends of ₹2,000 over the period.

Net Gain = (₹75,000 + ₹2,000) − ₹50,000 = ₹27,000

ROI = (₹27,000 / ₹50,000) × 100 = 54%

This is the absolute ROI over 2 years. The annualised equivalent (CAGR) would be approximately 24.9% per annum. Use the CAGR calculator to convert absolute ROI into annualised figures.

Key Things to Know

  • Simple vs annualised ROI: Simple ROI ignores time. Always mention the period when quoting an ROI ("54% over 2 years" is more meaningful than just "54%").
  • IRR for projects: For business projects or real estate with multiple cash flows at different times, IRR (Internal Rate of Return) gives a more accurate picture than ROI.
  • Real estate ROI: Real estate ROI should account for total investment (down payment + stamp duty + registration + renovation + EMI payments) and total returns (sale proceeds + rental income). Many investors focus only on the price appreciation, overstating ROI.
  • Adjusted ROI: To compare ROI across different risk levels, consider risk-adjusted ROI. An investment with 15% ROI and very high risk is inferior to one with 12% ROI and low risk.
  • EBITDA and ROI: For businesses, Return on Invested Capital (ROIC) or Return on Assets (ROA) are more precise than simple ROI, as they use EBITDA or operating profit in the numerator.

Related Calculators

CAGR Calculator →Calculate the Compound Annual Growth Rate of any investment instantly. Enter your initial value, final value, and time period to find CAGR or projected returns.
XIRR Calculator →Calculate XIRR for your mutual fund SIP, lumpsum, or portfolio with irregular cash flows. Get the true annualised return on any investment in seconds.
Compound Interest Calculator →Calculate how your investment grows with compound interest. Get future value, total interest earned, and see the impact of regular contributions — free and instant.

Related Terms

CAGRCompound Annual Growth RateIRRInternal Rate of ReturnXIRRExtended Internal Rate of ReturnEBITDAEarnings Before Interest, Taxes, Depreciation and Amortisation
Frequently Asked Questions
What is a good ROI?
A 'good' ROI depends entirely on the asset class and risk involved. For equity investments in India, an ROI greater than the Nifty 50 benchmark return is considered good. For real estate, 8–12% annual ROI is typical in major cities. For business investments, ROI should exceed the cost of capital.
What are the limitations of ROI?
ROI does not account for the time value of money or the duration of the investment. A 100% ROI over 10 years is far less impressive than 100% over 2 years, but simple ROI treats them the same. For time-adjusted analysis, use CAGR or IRR instead.
How is ROI different from profit margin?
Profit margin = (Net Profit / Revenue) × 100, measuring profitability relative to sales. ROI = (Net Gain / Investment Cost) × 100, measuring profitability relative to the money invested. A business can have a high profit margin but low ROI if it required heavy capital investment.
Can ROI be negative?
Yes. If the net gain is negative (i.e., you lost money), the ROI is negative. A negative ROI means you received less money than you invested. Evaluating ROI helps you avoid or exit poor-performing investments.
How is ROI used in marketing?
Marketing ROI measures the revenue generated by a campaign relative to its cost. For example, if you spent ₹1 lakh on an ad campaign that generated ₹5 lakh in new revenue, the marketing ROI is (5,00,000 − 1,00,000) / 1,00,000 × 100 = 400%.