ROI Formula Explained – Calculate Return on Investment Step by Step (2026)
Master the ROI formula with worked examples covering stock investments, real estate, marketing campaigns, and business decisions. Includes CAGR, inflation-adjusted ROI, and how to use a free ROI Calculator. By Rajesh Kumar Ram
The ROI formula is the single most widely used metric in finance — from Wall Street analysts to small business owners. Understanding how to calculate return on investment correctly is essential for comparing opportunities, justifying decisions, and measuring performance. This guide breaks down every version of the ROI formula with clear, practical examples for investors in the USA, UK, Canada, and Australia.
The Four Versions of the ROI Formula
1. Basic ROI Formula
ROI % = [(Final Value − Initial Investment − Costs) ÷ Initial Investment] × 100
Use when: comparing simple returns on a single investment over any period.
2. Net Profit ROI
ROI % = (Net Profit ÷ Total Investment) × 100
where Net Profit = Total Returns − Total Costs
Use when: evaluating business investments where multiple income streams and costs are involved.
3. CAGR (Compound Annual Growth Rate)
CAGR = [(Final Value / Initial Value)^(1 / Years)] − 1
Use when: comparing investments held for different time periods on an equal footing.
4. Real ROI (Inflation-Adjusted)
Real ROI = [(1 + Nominal ROI) / (1 + Inflation Rate)] − 1
Use when: assessing whether your investment actually grew your purchasing power in real terms.
Step-by-Step ROI Calculation Worked Examples
Example A: Stock Portfolio
- Initial investment: $50,000
- Value after 7 years: $89,000
- Fees and taxes paid: $3,500
- Dividends received: $7,000
Net Profit = ($89,000 + $7,000) − $50,000 − $3,500 = $42,500
Total ROI = ($42,500 / $50,000) × 100 = 85%
CAGR = (96,000/50,000)^(1/7) − 1 = 9.78% annually
Example B: Rental Property (UK)
- Property price: £250,000
- Annual rental income: £15,000
- Annual costs (maintenance, tax, insurance): £5,000
- Property value after 8 years: £330,000
Net rental income (8 years): (£15,000 − £5,000) × 8 = £80,000
Capital gain: £330,000 − £250,000 = £80,000
Total net return: £160,000
Total ROI = (£160,000 / £250,000) × 100 = 64%
CAGR: (330,000/250,000)^(1/8) − 1 = 3.57% price appreciation
Example C: Business Investment (Canada)
- New equipment cost: CAD $80,000
- Additional annual revenue generated: CAD $25,000/year for 5 years
- Additional operating costs: CAD $5,000/year
Total net benefit = (CAD $25,000 − $5,000) × 5 = CAD $100,000
ROI = ($100,000 / $80,000) × 100 = 125% over 5 years
CAGR = (180,000/80,000)^(1/5) − 1 = 17.6% annually
Marketing ROI Formula (ROAS vs ROI)
Marketing teams commonly use two different metrics:
- ROAS (Return on Ad Spend): Total Revenue ÷ Ad Spend. Example: $20,000 revenue from $5,000 ad spend = ROAS of 4 (or 400%). Doesn't account for product cost.
- Marketing ROI: (Revenue − Product Cost − Ad Spend) ÷ Ad Spend × 100. Accounts for product cost — more accurate profitability measure.
Rule of thumb: For most businesses, a 5:1 ROAS is considered good; a 3:1 ROAS breaks even on ad spend. Use our ROI Calculator to enter your exact numbers.
Real ROI: Why Inflation Matters
In a 3% inflation environment, a nominal 5% ROI = only 1.94% real ROI. In Australia's recent high-inflation period (4%–5%), even "safe" investment returns were barely keeping up with the cost of living. Always assess your real ROI to understand true wealth growth.
Frequently Asked Questions
What is the basic ROI formula?
ROI % = [(Final Value − Initial Investment − Costs) ÷ Initial Investment] × 100. Positive = profit; negative = loss.
How do you calculate annualized ROI (CAGR)?
CAGR = [(Final Value / Initial Value)^(1/Years)] − 1. $10,000 → $18,000 in 5 years = CAGR of 12.47% per year.
How do you calculate real ROI adjusted for inflation?
Real ROI = [(1 + Nominal ROI) / (1 + Inflation)] − 1. 8% nominal with 3% inflation = 4.85% real return.
How do you calculate marketing ROI?
Marketing ROI = [(Revenue − COGS − Ad Spend) / Ad Spend] × 100. $5,000 spend, $20,000 revenue, $10,000 COGS → 100% marketing ROI.
Can ROI be negative and what does it mean?
Yes. Negative ROI = financial loss. $10,000 invested, value drops to $7,500 with $200 fees = −27% ROI. Sometimes a negative ROI on a marketing campaign is acceptable if it builds brand equity measurable through other channels.