What Is ROI and How Do You Calculate It?

ROI — Return on Investment — is one of the most widely used metrics in finance, business and everyday decision-making. It answers a simple question: for every pound (or dollar) I put in, how much did I get back?

The Formula

ROI = (Net Profit ÷ Cost of Investment) × 100

Or equivalently: (Final Value − Initial Value) ÷ Initial Value × 100.

If you invest £1,000 and it grows to £1,250, your ROI is (£250 ÷ £1,000) × 100 = 25%.

A Practical Example

You spend £5,000 on a marketing campaign. It generates £18,000 in new sales. The cost of goods sold is £8,000. Net profit = £18,000 − £8,000 − £5,000 = £5,000. ROI = (£5,000 ÷ £5,000) × 100 = 100%. You doubled your marketing investment.

Why Time Period Matters

A 25% ROI sounds great — but is it over one year or ten years? ROI doesn't account for time, which is a significant limitation. An investment returning 25% over 10 years is far less impressive than one returning 25% in a single year.

For comparing investments over different timeframes, annualised ROI (or CAGR — Compound Annual Growth Rate) is more useful. An investment that doubles in 10 years has an annualised ROI of about 7.2%.

What ROI Doesn't Capture

Risk. Two investments might have the same expected ROI, but one might be far more volatile than the other. ROI alone doesn't tell you how certain that return is.

Opportunity cost. An 8% ROI looks good in isolation, but if a comparable investment returns 12%, you've effectively lost 4%.

Inflation. A 5% ROI in a year with 4% inflation is really only a 1% real return.

When It's Most Useful

ROI is most valuable as a quick comparison tool — ranking potential investments or projects by their expected return per pound spent. It's simple, universal, and easy to communicate. Just remember to compare like with like: same time period, same risk profile, same whether returns are gross or net of costs.