ROI Formula: How to Calculate Return on Investment

Quick answer: The ROI formula is ROI = (net return ÷ cost of investment) × 100, where net return is the total gain minus the cost. Spend $10,000 and get $13,000 back and your return on investment is ($13,000 − $10,000) ÷ $10,000 × 100 = 30%. Annualize it to compare investments of different lengths.

Small businesses make investment decisions all the time: a new piece of equipment, a marketing campaign, a software tool, a first hire. Return on investment (ROI) is the simplest way to compare those choices on the same scale. This guide explains the formula, shows how to define gains and costs honestly, works through three examples with the arithmetic shown, covers annualized ROI and related metrics, and lists the mistakes that make ROI figures misleading.

One note before you start: the numbers you need come from your books, bank records and invoices. Our free invoice generator creates PDF invoices in your browser, but it does not calculate ROI or keep financial records, so use a spreadsheet for the calculations below.

The ROI formula explained

There are two equivalent ways to write it:

• ROI = (gain from investment − cost of investment) ÷ cost of investment × 100
• ROI = net return ÷ cost of investment × 100

The result is a percentage. An ROI of 0% means you got your money back and nothing more; 100% means you doubled it; a negative figure means you lost money.

Defining the gain

The gain should be the benefit the investment creates, measured in profit or cash, not in revenue. Typical gains include:

• Gross profit from extra sales, which is revenue minus the direct cost of those sales. See gross profit vs net profit if you are unsure which line to use.
• Costs saved, such as labor hours eliminated or materials wasted less often.
• Resale or salvage value at the end of the investment's life.

Defining the cost

Include everything it took to make and run the investment over the period you measure:

• Purchase price, delivery, installation and setup.
• Training time and implementation fees.
• Ongoing costs such as maintenance, subscriptions, consumables and insurance.
• Financing costs, if you borrowed to make the investment.

Whatever you decide to include, write it down and apply the same rules to every option you compare. Inconsistent definitions are the most common reason two ROI figures cannot be compared.

How to use the ROI formula step by step

1. Pick the time period. One campaign month, one year, or the asset's whole useful life.
2. Total the costs for that period, including running costs.
3. Total the gains for that period in profit or cash terms.
4. Subtract costs from gains to get the net return.
5. Divide by the costs and multiply by 100.
6. Annualize if the period is not one year and you want to compare with other options.
7. Sanity-check the assumptions: would the gain have happened anyway without the investment?

In a spreadsheet, with total gain in B2 and total cost in B3, the formula is =(B2-B3)/B3, formatted as a percentage.

Worked example 1: a marketing campaign

An illustrative example for a fictional online store. It spends $4,000 on a month of paid ads. Tracking shows $25,000 of sales attributed to the campaign, and the store's gross margin on those products is 40%.

• Gross profit from the campaign: $25,000 × 40% = $10,000
• Net return: $10,000 − $4,000 = $6,000
• ROI: $6,000 ÷ $4,000 × 100 = 150%

Had the store used revenue instead of gross profit, it would have reported ($25,000 − $4,000) ÷ $4,000 = 525%, a figure more than three times too high. Gross margin depends on pricing and costs, which is why markup vs margin matters even for marketing decisions.

Worked example 2: equipment with annualized ROI

A print shop is considering a $20,000 machine that will save $7,500 a year in outsourcing costs. Maintenance is $500 a year. It expects to use the machine for four years and sell it for $2,000 at the end. All figures are illustrative.

• Net annual saving: $7,500 − $500 = $7,000
• Total gain over four years: ($7,000 × 4) + $2,000 resale = $30,000
• Net return: $30,000 − $20,000 = $10,000
• ROI over four years: $10,000 ÷ $20,000 × 100 = 50%
• Payback period: $20,000 ÷ $7,000 ≈ 2.9 years

A 50% return sounds strong, but it took four years. To compare it with, say, paying off a loan, convert it to a yearly rate.

Annualized ROI

Annualized ROI = ((1 + ROI) ^ (1 ÷ n)) − 1, where ROI is written as a decimal and n is the number of years.

For the print shop: (1 + 0.50) ^ (1 ÷ 4) − 1 = 1.5 ^ 0.25 − 1 ≈ 1.1067 − 1 ≈ 0.107, or about 10.7% a year.

The calculation assumes the return compounds evenly each year, which is a simplification but makes options of different lengths comparable. If you want to see how compounding works over time, the SEC's compound interest calculator on Investor.gov is a free, ad-free tool. In a spreadsheet, with total ROI as a decimal in B4 and years in B5, use =(1+B4)^(1/B5)-1.

For uneven cash flows over several years, finance professionals often prefer net present value (NPV) or internal rate of return (IRR), which account for the timing of each cash flow. Simple and annualized ROI are fine for most small business decisions, as long as you remember they do not discount future cash.

Worked example 3: hiring versus outsourcing

A consultant pays a freelancer $3,000 a month to handle client admin. Hiring a part-time employee would cost $2,400 a month in wages and payroll costs, plus $1,200 one-off for equipment and training. Measured over twelve months:

• Cost of hiring: ($2,400 × 12) + $1,200 = $30,000
• Gain (outsourcing cost avoided): $3,000 × 12 = $36,000
• Net return: $36,000 − $30,000 = $6,000
• ROI: $6,000 ÷ $30,000 × 100 = 20%

The positive ROI supports the hire, but non-financial factors such as management time, flexibility and employment obligations belong in the decision too.

Setting up the ROI formula in a spreadsheet

A simple sheet lets you compare several options side by side. Put each investment in its own row and use these columns:

Column	Contents	Example formula (row 2)
A	Investment name	Typed text
B	Total gain (profit or savings)	Typed or linked figure
C	Total cost	Typed or linked figure
D	Net return	=B2-C2
E	ROI	=D2/C2
F	Years	Typed figure
G	Annualized ROI	=(1+E2)^(1/F2)-1

Format columns E and G as percentages, then sort by column G to rank options. Copying the ROI formula down the column keeps every row on the same definition, which is the main advantage of doing this in a sheet rather than on a calculator. If revenue and profit figures are getting mixed up in your inputs, our explainer on revenue vs profit clears up the difference.

ROI and related metrics compared

Metric	Formula	Best used for
ROI	(gain − cost) ÷ cost	Comparing individual investments or projects
Annualized ROI	(1 + ROI) ^ (1 ÷ years) − 1	Comparing investments of different lengths
ROAS	revenue from ads ÷ ad spend	Quick ad channel comparisons (ignores costs of goods)
Payback period	investment ÷ annual net cash inflow	Judging how long cash is tied up
Return on assets (ROA)	net income ÷ total assets	Whole-business efficiency
Return on equity (ROE)	net income ÷ owner's equity	Return to owners on their capital
Break-even point	fixed costs ÷ contribution margin per unit	Minimum sales needed to cover costs

The ROI formula is not a replacement for the others. Break-even and ROI answer different questions: break-even tells you the minimum to avoid a loss, ROI tells you how much you gain beyond it. Our guide to the break-even point walks through that calculation.

Using ROI in everyday business decisions

• Pricing changes. Estimate the extra gross profit from a price rise against any lost volume. Our guide on how to price a product covers the strategies.
• Software. Compare subscription cost with hours saved multiplied by an hourly cost.
• Equipment. Include depreciation in your accounts, but use the actual cash outlay and savings for ROI. See how to calculate depreciation for the accounting side.
• Collections. Faster invoicing and clear payment terms free up cash that would otherwise sit in receivables, which matters for cash flow management even when it does not show up as ROI.
• Budget allocation. Rank proposed spending by expected ROI and payback when building a small business budget.

Checklist before you trust an ROI figure

• The time period is stated and the same for all options compared.
• Gains are measured in profit or cash savings, not revenue.
• All costs are included: purchase, setup, training, running and financing costs.
• Resale or salvage value is included only if it is realistic.
• Gains that would have happened anyway are excluded.
• Multi-year returns are annualized before comparison.
• Assumptions are written down so the estimate can be checked later.
• You have compared the forecast with actual results after the fact.

Common mistakes with return on investment

• Using revenue instead of profit. It can overstate ROI several times over, as example 1 shows.
• Ignoring time. A 30% return over five years is far weaker than 30% in one year.
• Leaving out running costs. Maintenance, subscriptions and staff time erode the return.
• Attributing everything to the investment. Seasonal sales or repeat customers would often have bought anyway.
• Ignoring risk. A certain 15% may be better than an uncertain 40%.
• Comparing figures with different definitions. One team's ROI may include overhead while another's does not.
• Ignoring cash flow. A high-ROI project can still strain cash if the payback is slow.
• Never checking actual results. Revisit forecasts so the next estimate is better.

Bottom line

The ROI formula is simple: net return divided by cost. The real skill is defining gains and costs honestly, measuring in profit rather than revenue, and annualizing returns so options of different lengths are comparable. Use ROI alongside payback period and break-even analysis, and record your assumptions so you can learn from each decision.