What Is ROI (Return on Investment)?
ROI (return on investment) is a performance measure that evaluates the efficiency of an investment by comparing its net gain to its cost. It's calculated as (net return ÷ cost of investment) × 100 and expressed as a percentage.
What ROI is and why it matters
ROI is a simple, universal way to judge whether an investment paid off and to compare very different opportunities on a common scale. A positive ROI means the investment gained value; a higher ROI means more efficient use of the money. Its strengths — simplicity and comparability — are also its weaknesses: basic ROI ignores time (a 20% return over one year is far better than over five) and risk. That's why it's often paired with time-sensitive measures like annualized return or IRR. Still, as a quick gut-check on "was this worth it?", ROI is one of the most widely used metrics in business.
A worked example
A business spends $50,000 on a marketing campaign that generates $70,000 in attributable gross profit. Net return = $70,000 − $50,000 = $20,000. ROI = ($20,000 ÷ $50,000) × 100 = 40%. If a second campaign cost $10,000 and returned $16,000 in profit, its ROI is ($6,000 ÷ $10,000) × 100 = 60% — a better use of money per dollar spent, even though it produced less total profit.
How firms handle it today
Firms calculate ROI to evaluate investments, projects, and marketing spend for clients, often layering in time and risk adjustments for larger decisions rather than relying on basic ROI alone.
Related terms
- Net income
- Valuation
- KPI
- Forecasting
- Capital
FAQ
What's the ROI formula?
(Net return ÷ cost of investment) × 100, expressed as a percentage.
What are the limitations of ROI?
It ignores time and risk — a return says nothing about how long it took to earn or how risky it was — so it's often paired with annualized return or IRR.
What is a good ROI?
It depends entirely on context and alternatives; any positive ROI adds value, but it should be judged against other opportunities and the risk taken.