How to Calculate ROI: Formula, Examples, and 5 Common Mistakes

By the CalcWise editorial team · Updated September 26, 2026 · 8 min read

Return on investment — ROI — is the most quoted profitability number in finance. It appears in earnings reports, marketing dashboards, real-estate listings, and retirement plans. Yet it is also one of the most misused numbers around, because while the formula is simple arithmetic, choosing the right inputs is not.

This guide fixes that. You will learn the basic ROI formula and what each term really means, walk through two fully worked examples (a five-year investment and a marketing campaign), see how to annualize ROI so you can compare results fairly, and avoid the five mistakes that distort ROI most often. Every example shows its arithmetic, so you can check each number yourself.

The basic ROI formula

At its core, ROI answers one question: for every dollar you put in, how many dollars of profit did you get back? The formula is:

ROI = (Gain − Cost) ÷ Cost × 100

In words: subtract what you spent from what you got back, divide the result by what you spent, and multiply by 100 to express it as a percentage. Each term deserves a careful definition, because most ROI errors come from defining these sloppily:

• Cost — everything you put in. That means the purchase price plus every associated outlay: brokerage commissions, fund expense ratios, closing costs on property, taxes on the purchase, and any setup or installation fees. Counting only the sticker price is the single most common way people inflate their ROI.
• Gain — everything the investment returned to you. That is the final sale value plus any income collected along the way, such as dividends, interest, or rent. If you have not sold yet, use the current market value as the gain; the result is then an unrealized ROI.
• Gain − Cost — your net profit in dollars. Dividing by Cost expresses that profit relative to the size of the original outlay, which is what makes ROI comparable across investments of different sizes.

Multiplying by 100 only converts the decimal into a percentage — 0.32 and 32% are the same answer. And ROI can be negative: whenever the gain is smaller than the cost, you lost money. A quick sanity check: buy shares for $1,000, collect $40 in dividends, and sell for $1,260. Gain = $1,300. ROI = ($1,300 − $1,000) ÷ $1,000 × 100 = 30%.

Worked example 1: a five-year investment

Suppose you invest $10,000 and, five years later, the investment is worth $16,000. You received no dividends or other income along the way. Here is the calculation, step by step:

1. Find the profit. $16,000 − $10,000 = $6,000.
2. Divide by the cost. $6,000 ÷ $10,000 = 0.60.
3. Convert to a percentage. 0.60 × 100 = 60%.

The investment earned a 60% ROI over five years — every dollar you put in grew into $1.60. Sixty percent sounds impressive, but notice what the number does not tell you: over what time? A 60% gain in a single year is spectacular; the same 60% spread over five years is solid but ordinary. Simple ROI has no sense of time at all, which is why the section on annualized ROI below matters so much.

Worked example 2: a marketing campaign

ROI is not just for stocks and property — marketers use it constantly to judge whether ad spending pays off. The setup here is a little different, so watch the definitions. Suppose a campaign has $5,000 of ad spend, generates $20,000 in revenue, and the products sold cost $12,000 to make and deliver (cost of goods sold).

In marketing ROI, the Cost in the denominator is the marketing investment itself — the $5,000 of ad spend. The product costs come out on the gain side, because they reduce the profit the campaign produced:

1. Find the net profit. $20,000 (revenue) − $12,000 (product costs) − $5,000 (ad spend) = $3,000.
2. Divide by the marketing cost. $3,000 ÷ $5,000 = 0.60.
3. Convert to a percentage. 0.60 × 100 = 60%.

The campaign delivered a 60% ROI — sixty cents of profit for every dollar of ad spend. Now the critical lesson: ROI uses profit, not revenue. If you mistakenly put revenue into the formula, you get ($20,000 − $5,000) ÷ $5,000 = 300% — a number that ignores $12,000 of product costs, flatters the campaign wildly, and could tempt you to scale an effort that is barely profitable. Whenever someone quotes you a marketing ROI, ask whether product costs were subtracted. If the answer is no, the number is fiction.

Annualized ROI: comparing fairly across time

Simple ROI tells you how much you made, but not how long your money was tied up to make it. To compare investments held for different lengths of time, convert each result to a per-year rate. The formula is:

Annualized ROI = (End value ÷ Start value)^{(1 ÷ years)} − 1

Apply it to the five-year investment from the first example ($10,000 growing to $16,000):

1. Divide end by start. $16,000 ÷ $10,000 = 1.6.
2. Raise to the power 1 ÷ 5 (the fifth root). 1.6^0.2 ≈ 1.0986.
3. Subtract 1 and convert to a percentage. 1.0986 − 1 = 0.0986 → 9.86%.

The investment compounded at about 9.86% per year. Now a fair comparison is possible: put that 9.86% next to a competing one-year opportunity offering 12%, and the choice is clear — the "60%" headline looked bigger, but per year the five-year investment grew more slowly. Without annualizing, you might have picked the weaker option while feeling confident about it.

Two caveats. First, annualizing a short holding period extrapolates — a great single month does not mean you will repeat it twelve times. Second, when cash flows in and out at irregular times during the period, annualized ROI is only an approximation; the internal rate of return (IRR) handles that case properly.

5 common mistakes that distort ROI

ROI is simple arithmetic, which is exactly why errors hide in the inputs rather than the formula. Here are the five distortions to watch for:

1. Not annualizing before comparing. A 60% return over five years (≈9.86% annualized) is worse per year than a 12% return over one year. Anytime two investments were held for different lengths of time, annualize first — otherwise the longer holding period gets an unfair advantage.
2. Leaving out fees, taxes, and all-in costs. Commissions, fund expense ratios, closing costs, advisory fees, and taxes on gains all belong in the Cost term. Revisit the first example with $1,200 of total fees: true cost = $11,200, profit = $16,000 − $11,200 = $4,800, and ROI = $4,800 ÷ $11,200 ≈ 42.9% — not 60%. Small leaks, honestly counted, change the story.
3. Confusing revenue with profit. As the marketing example showed, using revenue instead of profit turned a 60% ROI into a 300% mirage. Revenue is vanity; profit is sanity. Any ROI figure that does not subtract the full cost of delivering the result should be treated with suspicion.
4. Ignoring risk and volatility. Imagine two portfolios that both post a 60% five-year ROI. One glided upward smoothly; the other plunged 40% in year two before recovering. The ROI is identical, but the experiences — and the danger of panic-selling at the bottom — were not. ROI says nothing about the ride, so never use it as your only comparison between investments.
5. Ignoring inflation. A nominal gain is not a purchasing-power gain. That 9.86% annualized return, measured against 3% annual inflation, is really (1.0986 ÷ 1.03) − 1 ≈ 6.66% per year in real terms. For long-term goals like retirement, the inflation-adjusted figure is the one that matters.

FAQ

Try it yourself: plug your own numbers into our free ROI Calculator — enter your costs, gains, and time horizon to get both simple and annualized ROI instantly, with every step shown.