How to Calculate ROI (Return on Investment)? Complete Analysis of the Formula, Examples, and Optimization Strategies

Essential Knowledge Before Investing: What is ROI?

Return on Investment (ROI) is a core indicator for measuring investment efficiency, expressed as a percentage indicating how much profit is generated from the invested capital. Whether it’s personal stock trading, running a business, advertising campaigns, or corporate project evaluation, ROI is the most straightforward tool for assessing profitability.

Simply put, ROI tells you: for every dollar you invest, how much profit will you ultimately earn.

How to Calculate ROI? Breakdown of the Core Formula

Basic Calculation Formula

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

Where net profit = investment income - investment cost

Example Calculation

Suppose you buy a stock for 1 million, and sell it at 1.3 million, then:

• Net profit = 1.3 million - 1 million = 300,000
• ROI = (300,000 ÷ 1,000,000) × 100% = 30%

This 30% is your ROI. But in reality, calculations are often more complex, considering fees, taxes, dividends, and other factors.

Different Scenarios for ROI Calculation

Stock Investment ROI Practical Calculation

To illustrate with a more realistic example:

Suppose you buy 1,000 shares at $10 each, sell at $12.5 after a year, and receive $500 in dividends, with transaction fees totaling $125.

Calculation steps:

• Total income = (12.5 × 1,000) + 500 = $13,000
• Total cost = (10 × 1,000) + 125 = $10,125
• Net profit = $13,000 - $10,125 = $2,875
• ROI = (2,875 ÷ 10,125) × 100% ≈ 28.4%

This example shows that when calculating ROI, all costs must be included to obtain an accurate return rate.

E-commerce and Advertising ROI

For business owners, the ROI calculation differs slightly:

Formula: ROI = [(Sales Revenue - Cost of Goods Sold) ÷ Cost of Goods Sold] × 100%

For example: product cost $100, selling price $300, with $500 spent on advertising to sell 10 units.

• Total sales = 300 × 10 = $3,000
• Total cost = (100 × 10) + 500 = $1,500
• ROI = [(3,000 - 1,500) ÷ 1,500] × 100% = 100%

ROI vs ROAS: Don’t Confuse Them

In advertising, people often confuse ROI and ROAS, but they are quite different.

ROAS (Return on Ad Spend) = Revenue ÷ Advertising Cost

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

Key Differences:

• ROI measures profit, considering all costs
• ROAS measures revenue, only considering advertising costs
• ROI is more comprehensive; ROAS focuses on advertising effectiveness

Annualized Return: Bringing Time to the Same Starting Line

When comparing investments over different periods, using ROI directly can be misleading. Annualized return eliminates the effect of time differences.

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

Suppose Plan A yields 100% return in 2 years, and Plan B yields 200% in 4 years, which to choose?

• Plan A annualized rate = [)(1+1)^(1/2) - 1] × 100% ≈ 41.4%
• Plan B annualized rate = [((1+2)^(1/4) - 1] × 100% ≈ 31.6%

Clearly, Plan A has a higher annualized return and is the better choice.

Corporate Investment Evaluation: ROI, ROA, ROE Triangle

ROI isn’t only used for individuals; it’s also a key indicator for assessing corporate profitability. Other common metrics include ROA and ROE.

For example, a company with assets of 1 million (50% debt, 50% equity), investing in a project of 100,000, which later grows to 200,000.

• ROI of the project = )(200,000 - 100,000) ÷ 100,000( = 100%
• Annual net profit of 1.5 million, ROA = 150 ÷ 100 = 150%
• ROE = 150 ÷ 50 = 300%

How to Improve ROI? Practical Tips

) Basic Logic

From the formula, increasing ROI boils down to two paths: expand profits or reduce costs.

In practice, reducing costs often has limited effect. For example, in stock investing, choosing brokers with low fees and reducing trading frequency is less impactful than selecting good investment targets.

( ROI Ranking of Different Assets

Generally, the ROI ranking is: Crypto & Forex > Stocks > Indexes & Funds > Bonds

But note: higher ROI usually comes with higher risk. If Crypto volatility is 2.3 times that of stocks, you can moderately reduce position sizes to balance returns and risks.

) Valuation-Based Risk Adjustment

When investing in similar assets, lower valuation assets tend to have less risk and higher potential returns. For example, evaluating index investments: Index A with PE at the 70th percentile (high valuation), Index B at the 50th percentile (moderate valuation). B offers better risk and return profiles.

High-Return Investment Methods Overview

( 1. CFD Trading

CFD (Contract for Difference) is an OTC trading instrument characterized by low margin requirements. For stocks, only 20% margin is needed.

Holding $10,000, investing $2,000 in CFD trading, earning $500 profit, ROI = )500 ÷ 2,000( × 100% = 25%, which is higher than direct stock purchase returns.

However, CFD trading carries high risk and must be done on regulated platforms.

) 2. Forex Margin Trading

The forex market has the largest daily trading volume globally, using two-way trading and leverage mechanisms, with sometimes over 30% returns. But the forex market is highly affected by international events, requiring substantial experience.

Practical advice: set reasonable stop-loss and take-profit levels to protect gains and control risks.

( 3. Gold Investment

Gold combines value preservation and appreciation functions, making it a preferred hedging tool. In 2019, international gold prices rose 18.4%, reaching an 8-year high. During economic uncertainty, gold often performs relatively steadily.

) 4. Stock Investment

The US stock market has an average annual ROI of over 12% over nearly 200 years. Thanks to reasonable valuation, stable dividends, and policy support, it remains a stable investment choice.

Pitfalls and Limitations of Using ROI

1. Ignoring the Time Dimension

Two projects with ROIs of 25% and 15% cannot be directly compared. If the former takes 5 years and the latter only 1 year, comparing their annualized returns is fairer.

2. High ROI does not equal good investment

Higher ROI often means higher risk. Focusing solely on high ROI without assessing volatility can lead to losses. It’s important to consider risk indicators like volatility and maximum drawdown for rational decision-making.

3. ROI may be overestimated

Omitting certain costs during calculation inflates ROI. For real estate, mortgage interest, property taxes, insurance, and maintenance costs reduce actual returns. Ignoring these leads to distorted results.

4. Only focusing on financial returns

ROI measures economic return but ignores social and environmental benefits. Some projects have a higher overall value beyond just financial metrics.

Final Summary

While the formula for calculating ROI is simple, using it effectively requires multi-dimensional thinking. Combining annualized return, volatility, valuation, and other factors provides a comprehensive assessment to find the most balanced risk-return investment. Remember: high ROI and low risk are often mutually exclusive. The ideal investment is within your risk tolerance, offering the best possible return.