Understanding ROI (Return on Investment)

ROI measures profitability of an investment relative to its cost. Formula: ROI = ((Final Value - Initial Investment) / Initial Investment) × 100%. Example: Invest $10,000, sell for $12,500 = ($2,500 / $10,000) × 100 = 25% ROI. Use ROI to: compare investment options, evaluate business decisions, assess marketing campaigns, analyze real estate deals, measure project success.

Good ROI Benchmarks

Stock Market: Historical average ~10% annually. Real Estate: 8-12% with leverage. Business Investments: 15-30% considered good. Marketing/Advertising: 5:1 ROI (500%) is excellent. Education: Varies widely, often 10-15% lifetime return. Context matters—7% ROI is great for safe investments, poor for risky ventures.

ROI Limitations

ROI doesn't account for: time value of money (7% over 1 year better than 7% over 5 years), risk differences, opportunity cost, cash flow timing. Use alongside other metrics like IRR (Internal Rate of Return), NPV (Net Present Value), and payback period for complete analysis. Use our investment calculator for time-adjusted returns.