How to calculate ROI? Master this financial metric to make your investment returns clear at a glance.

Many people ask after investing: How much money have I actually earned? How can I measure whether an investment is profitable or a loss? The answer lies in the metric Return on Investment (ROI).

What is ROI? One formula to solve it

ROI (Return on Investment) essentially equals: your earnings divided by your invested capital, expressed as a percentage.

A simple understanding: Invest 1 million in stocks, sell for 1.3 million, then ROI is (130-100)/100=30%.

But in actual practice, the composition of income and costs is far more complex. That’s why many people’s calculated ROI doesn’t match expectations.

How to calculate ROI? Breaking down the core formula

Core formula: ROI = Net Profit / Invested Capital × 100%

where Net Profit = Total Revenue - Total Costs

It sounds simple, but the definitions of “Total Revenue” and “Total Costs” vary greatly across different scenarios.

Stock Investment ROI Example

Suppose you buy 1,000 shares at $10 each, sell at $12.5 after a year, receive $500 in dividends, and pay $125 in trading commissions.

Calculation:

• Total Revenue = Sale proceeds + Dividends = 12.5×1000 + 500 = $13,000
• Total Costs = Purchase cost + Trading fees = 10×1000 + 125 = $10,125
• Net Profit = 13,000 - 10,125 = $2,875
• ROI = 2,875 / 10,125 ≈ 28.75%

E-commerce Advertising ROI Example

Cost to produce one item: $100, selling price: $300. Sold 10 items via advertising, with $500 ad spend.

Calculation:

• Total Revenue = Sales = 300×10 = $3,000
• Total Costs = Product costs + Advertising = 100×10 + 500 = $1,500
• Net Profit = 3,000 - 1,500 = $1,500
• ROI = 1,500 / 1,500 = 100%

ROAS and ROI, don’t confuse them anymore

In e-commerce and advertising, you often hear about ROAS (Return on Ad Spend), which many confuse with ROI.

The key difference:

• ROI measures profit, calculated as: ROI = (Sales Revenue - Total Costs) / Total Costs
• ROAS measures revenue, calculated as: ROAS = Sales Revenue / Advertising Cost

Using the above example with ROAS: ROAS = 3,000 / 500 = 600%

It looks like ROAS is a bigger number, but don’t be fooled—ROAS only considers advertising costs, not product costs, so the figure can be inflated.

Annualized ROI: Time is the best standard for evaluation

Suppose you have two investment options:

• Option A: 100% profit in 2 years
• Option B: 200% profit in 4 years

Which one to choose? Many people pick B directly, but that’s wrong.

You should compare using annualized return:

Annualized ROI formula: (Annualized Return) = [(Total Return + 1)^(1/Number of Years) - 1] × 100%

Calculations:

• Option A: [1 + 1(^)1/2( - 1] × 100% ≈ 41.4%
• Option B: [2 + 1)^(1/4) - 1] × 100% ≈ 31.6%

The higher annualized return indicates that Option A is the better choice.

How to distinguish ROI, ROA, and ROE?

These three metrics all measure returns but are used in different contexts and have different meanings:

Example: A company has total assets of $1 million, with $500,000 debt and $500,000 equity. It invests $100,000 in a project, which yields a final profit of $200,000.

• ROI of the project = (200,000 - 100,000) / 100,000 = 100%
• The company’s annual profit = $1.5 million, so ROA = 150%
• Shareholders’ ROE = 150 / 50 = 300%

How to improve your ROI?

From the formula, there are only two ways: increase profit or reduce costs. But in reality, both are not so easy.

The most direct method: Choose investment options with inherently high ROI.

Generally, the ranking of ROI among investment types is: Cryptocurrency & Forex > Stocks > Indexes & Funds > Bonds

But remember: High ROI often comes with high risk. When choosing high-yield products, also consider volatility, valuation, and other indicators.

For example, if cryptocurrency volatility is 7, stock volatility is 3, you might adjust your position to a 3:7 ratio to balance risk. Similarly, if Index A’s PE percentile is 70% (overvalued) and Index B’s is 50% (normal valuation), Index B has lower risk and potentially higher returns.

Four high-ROI investment methods comparison

( 1. CFD Contract for Difference Trading Flexible operation, adjustable leverage. For example, stock CFDs require only 20% margin, so with $10,000 principal, you only need $2,000 to trade. If you earn $500, ROI = 500/2000 = 25%, a considerable return. But risk control is crucial.

) 2. Forex Margin Trading The world’s largest financial market, with huge trading volume and sometimes over 30% returns. 24/7 trading, but heavily influenced by international situations, requiring strong professional knowledge and risk resistance.

( 3. Gold Investment A safe-haven tool with value preservation and appreciation functions. Historically stable, with an 18.4% increase in 2019, making it a good choice during economic volatility.

) 4. Stock Investment Taking US stocks as an example, with an average annual return of over 12% over nearly 200 years, low valuation, high dividends, and friendly policies make it a relatively safe long-term investment.

Four major pitfalls when using ROI, avoid them

( Pitfall 1: Ignoring the time factor Project X’s ROI of 25% sounds better than project Y’s 15%, but if X takes 5 years and Y only 1 year, the conclusion is reversed. Always compare annualized ROI.

) Pitfall 2: Only looking at ROI without considering risk High-ROI investments usually have high volatility. Focusing only on ROI may lead to losses in the first year, panic selling, and finally significant losses.

Pitfall 3: Incomplete cost calculation leading to inflated ROI

When evaluating real estate ROI, only looking at property appreciation ignores mortgage interest, taxes, insurance, maintenance costs. The calculated ROI becomes artificially high and cannot guide actual investment.

Pitfall 4: Only focusing on financial returns, ignoring other benefits

ROI emphasizes numerical profit, but some investments have social or environmental benefits that cannot be measured by ROI, underestimating the true value. To address this, the concept of SROI (Social Return on Investment) has been proposed.

Key points summary: ROI = ###Net Income / Invested Capital### × 100%, is the most universal investment metric. But don’t blindly chase high ROI—consider timeframes, risks, complete costs, and multiple benefits to make truly smart investment decisions.