Return on Investment (ROI) Calculator
Percentage return relative to cost.
Formula first
Overview
Return on Investment (ROI) is a fundamental financial metric used to evaluate the efficiency of an investment or compare the performance of several different assets. It measures the amount of return on an investment relative to its initial cost, expressing the result as a percentage of that cost.
Symbols
Variables
ROI = ROI, Gain = Final Value, Cost = Initial Cost
Apply it well
When To Use
When to use: ROI is best utilized when comparing projects with different initial capital requirements to determine which provides the best relative yield. It is an essential tool during budget planning, capital expenditure analysis, and evaluating the historical performance of stock or real estate portfolios.
Why it matters: This ratio allows investors to filter out underperforming assets and prioritize ventures that maximize capital efficiency. In the corporate world, ROI is critical for justifying marketing spend, R&D projects, and infrastructure upgrades to stakeholders.
Avoid these traps
Common Mistakes
- Using revenue instead of profit.
- Ignoring time value of money.
One free problem
Practice Problem
An investor purchases shares of a tech company for 6,500. Calculate the Return on Investment (ROI) for this transaction.
Solve for: ROI
Hint: Subtract the cost from the gain to find the net profit, then divide by the cost and multiply by 100.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Wikipedia: Return on Investment
- Principles of Corporate Finance by Brealey, Myers, and Allen
- Investopedia: Return on Investment (ROI)
- Brealey, Richard A., Myers, Stewart C., and Allen, Franklin. Principles of Corporate Finance. McGraw-Hill Education.
- Ross, Stephen A., Westerfield, Randolph W., and Jaffe, Jeffrey F. Corporate Finance. McGraw-Hill Education.
- AQA A-Level Business — Financial Decision Making