How to properly interpret investment return rates? An article explaining ROI, ROAS, and annualized return rates

In investment decisions, nothing is more concerning than “how much profit this investment can make.” The investment return(ROI) is the core indicator used to answer this question, but many investors still have only a superficial understanding of its calculation methods and practical applications. We will use concrete cases and data to help you thoroughly grasp the essence of investment return.

What is ROI? Clarifying the core concept once and for all

Return on Investment(ROI) essentially measures the “input-to-output ratio” as a financial indicator. Whether for personal finance or business operations, ROI can intuitively reflect the profitability of an investment.

In simple terms, the logic of the return calculation formula is straightforward: Net profit ÷ Total invested amount × 100% = ROI

This indicator is widely used because of its versatility—regardless of whether you’re investing in stocks, real estate, crypto, or running a business, the same logic applies for evaluation.

Examples comparing investment return calculation formulas

Let’s use three different cases from various fields to demonstrate how the return formula is applied in practice.

Stock Investment ROI Calculation

Suppose you buy 1,000 shares at $10 each, hold for a year, and sell at $12.5, receiving $500 in dividends during the period. The trading commission is $125.

Calculation process:

• Total income = (12.5 × 1000) + 500 = $13,000
• Total cost = (10 × 1000) + 125 = $10,125
• Net profit = $13,000 - $10,125 = $2,875
• ROI = $2,875 ÷ $10,000 = 28.75%

This case highlights an important detail: when calculating return, you must consider all hidden costs (commissions, taxes, fees) and not just the buy-sell difference.

E-commerce Advertising ROI and ROAS Difference

Product production cost: $100, selling price: $300, sold 10 units via advertising, with $500 ad spend.

Using ROI:

• Revenue = 300 × 10 = $3,000
• Cost = (100 × 10) + 500 = $1,500
• ROI = ((3,000 - 1,500)) ÷ 1,500 = 100%

But if we look at it with ROAS(Return on Ad Spend):

• ROAS = 3,000 ÷ 500 = 600%

The key difference: ROI measures net profit, ROAS measures revenue; ROI accounts for all costs, ROAS only considers ad spend. In practice, many practitioners refer to “ROI” when they mean ROAS, so be especially aware of this distinction.

Application of ROI in Business Projects

A company invests 100,000 yuan in a project, earning 200,000 yuan profit after a year. The ROI = (20 - 10) ÷ 10 = 100%.

But to evaluate overall company performance, you also need to look at ROA(Return on Assets) and ROE(Return on Equity):

For example: a company with assets of 1 million yuan, of which 500,000 yuan is debt and 500,000 yuan is equity, with an annual profit of 1.5 million yuan, has ROA = 150%, ROE = 300%.

The importance of annualized ROI: considering time factors

A common misconception is to look only at ROI figures, ignoring the investment period. The annualized ROI(Annualized ROI) addresses this issue.

Calculation formula: Annualized return(%) = [(Total return rate + 1)^(1/years) - 1] × 100%

Comparing two investment options:

• Option A: Total return over 2 years is 100%, annualized return = [(1+1)^(1/2) - 1] × 100% = 41.4%
• Option B: Total return over 4 years is 200%, annualized return = [(2+1)^(1/4) - 1] × 100% = 31.6%

Although Option B’s total return is higher, the annualized return shows that Option A’s average yearly gain is actually better.

ROI ranking across different investment types and risk comparison

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

But higher ROI often comes with higher risk:

• CFD Trading: Leverage less than (20%), short-term ROI can exceed 25%, but volatility is high
• Forex Margin Trading: Annual returns can exceed 30%, but heavily influenced by international factors, requiring strong risk management
• Gold Investment: More stable, with recent gains around 15-20%, also serving as a store of value
• Stock Investment: US stocks have an average annual return of over 12%, relatively stable and transparent

Investors should adjust their allocations based on risk tolerance. For example, if a certain cryptocurrency’s volatility is 7 times that of stocks, consider reversing the investment ratio to 3:7.

How to optimize investment return

The core logic to improve ROI is simple: Increase profits or reduce costs. But practical strategies often require more nuanced approaches:

1. Lower transaction costs: Choose brokers with low fees, reduce trading frequency, select high-dividend stocks
2. Select high-ROI assets: Invest directly in high-return asset classes, but assess associated volatility and risks
3. Use valuation metrics: For index investments, assets with PE percentile at 50% are less risky and have greater potential than those at 70%
4. Combine with annualized metrics: Avoid being fooled by short-term high ROI figures; compare using annualized return

Limitations of ROI in investment

Despite its widespread use, ROI has limitations:

Time factor omission: A 25% ROI over 5 years is very different from 15% over 1 year, but simple ROI comparisons can be misleading. Annualized ROI provides a more accurate reflection.

Ignoring risk: High ROI investments tend to be volatile. Focusing only on ROI without considering volatility can lead to panic selling after initial losses.

Incomplete cost accounting: For real estate, only considering buy-sell difference ignores mortgage interest, taxes, maintenance costs, which can significantly overstate ROI.

Neglecting non-financial benefits: ROI measures economic returns but cannot reflect social or environmental value. To address this, some have developed “Social Return on Investment” and other supplementary metrics.

Investment decisions should consider ROI figures, investment duration, risk levels, and personal goals comprehensively, rather than relying on a single indicator.