How to Calculate ROI: Formula, Examples and Common Pitfalls
To calculate ROI (return on investment), subtract what you paid from what you got back, divide that net profit by what you paid, and multiply by 100. If you buy $5,000 of stock and later sell it for $6,200, your net profit is $1,200 and your ROI is $1,200 ÷ $5,000 × 100 = 24%. A positive number means you made money, zero means you broke even, and a negative number means you lost money.
That single percentage is easy to compute and easy to misuse. Simple ROI ignores how long you held the investment, how risky it was, what taxes and fees took, and when the cash arrived. This guide shows the formula on stocks, real estate, equipment and marketing, then explains annualized ROI (CAGR), the situations where ROI misleads, and what benchmarks to compare against in 2026. You can check any example with our ROI Calculator.
The Basic ROI Formula
ROI = (net profit / cost) × 100
ROI = ((final value - amount invested) / amount invested) × 100
Both lines are the same calculation. Net profit is everything you received (sale proceeds plus any dividends, rent or interest) minus everything you spent, including fees.
A loss works the same way. If you buy a stock for $5,000 and sell it for $3,500, ROI = ($3,500 - $5,000) ÷ $5,000 × 100 = -30%.
ROI Examples: Stocks, Real Estate, Equipment and Ads
Stock market
You invest $10,000 in an index fund that grows 7% a year for five years. It ends at $14,026 (10,000 × 1.07^5), so:
ROI = ($14,026 - $10,000) / $10,000 × 100 = 40.3%
That is 40.3% in total, which works out to 7% a year with compounding. The 7% is a hypothetical rate chosen for the example, not a forecast.
Rental property
You buy a property for $250,000, spend $30,000 on renovations, collect $36,000 in net rental income over three years, then sell for $340,000.
Net profit = ($340,000 - $250,000) + $36,000 - $30,000 = $96,000
Total cost = $250,000 + $30,000 = $280,000
ROI = $96,000 / $280,000 × 100 = 34.3%
That is 34.3% over three years, or roughly 10.3% a year if you annualize it (see below) and ignore when the rent arrived. The example leaves out selling costs and taxes, which would lower it.
Business equipment
You spend $15,000 on oven equipment for a bakery. Over the next year it adds $22,000 of profit, after the extra ingredients and labor.
ROI = ($22,000 - $15,000) / $15,000 × 100 = 46.7%
Marketing spend
You spend $3,000 on ads over two months. They bring in $9,500 of revenue, and the goods sold cost $4,200.
Net profit = $9,500 - $4,200 - $3,000 = $2,300
ROI = $2,300 / $3,000 × 100 = 76.7%
Marketing ROI is measured against the ad spend, after subtracting the cost of the goods sold. ROAS (return on ad spend) is a different number: revenue divided by ad spend, which is $9,500 ÷ $3,000 = 3.17 here. ROAS looks bigger because it ignores product costs.
Simple ROI vs. Annualized ROI (CAGR)
Simple ROI ignores time. A 50% return over one year and a 50% return over ten years both show as 50%. To compare investments held for different lengths, convert to an annualized ROI, also called compound annual growth rate (CAGR):
Annualized ROI = ((ending value / beginning value) ^ (1 / years) - 1) × 100
| Metric | Investment A (stock) | Investment B (property) |
|---|---|---|
| Cost | $20,000 | $200,000 |
| Final value | $32,000 | $320,000 |
| Holding period | 3 years | 8 years |
| Simple ROI | 60% | 60% |
| Annualized ROI | 16.96% | 6.05% |
Both have a 60% simple ROI, but A earned it in 3 years (16.96% a year) and B took 8 (6.05% a year). Per year, A was about 2.8 times as efficient. Our Investment Return Calculator computes both figures, including for regular contributions.
When ROI Is Misleading
It ignores risk
Two investments can both show 12% a year while one is a Treasury note and the other a speculative asset. ROI says nothing about the chance of losing money, so pair it with a look at volatility and whether you can afford the downside. For scale, the S&P 500 lost 18.0% in 2022 even though its long-run average is positive.
It ignores when cash arrives
Suppose you invest $10,000 and receive $2,000 a year for six years. You get back $12,000, so simple ROI is 20%. But money received in year one is worth more than money received in year six. The internal rate of return (IRR), which accounts for timing, is only about 5.5% a year for this stream. Use IRR or net present value (NPV) when cash flows are uneven.
It often leaves out taxes and fees
- Taxes. Gains on assets held one year or less are taxed as ordinary income (rates of 10% to 37%). For most assets held longer than a year, 2026 long-term capital gains rates are 0%, 15% or 20%, depending on taxable income. The 0% rate covers taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly; the 20% rate starts above $545,500 (single) and $613,700 (joint). A 3.8% net investment income tax can also apply above $200,000 of modified adjusted gross income for single filers ($250,000 joint). In the stock example, a 15% tax on the $1,200 gain leaves $1,020, which turns a 24% ROI into 20.4%.
- Fees and transaction costs. Brokerage commissions, fund expenses, closing costs and agent commissions all belong in the cost.
- Ongoing costs. Property taxes, insurance, repairs and maintenance reduce net profit.
- Opportunity cost. Money tied up in one investment cannot earn a return elsewhere.
Run your own numbers with the Capital Gains Calculator.
Leverage distorts it
Buy a $300,000 property with $60,000 down and watch it rise 10% to $330,000. Your ROI on the cash you put in is $30,000 ÷ $60,000 = 50%. If the price falls 10% instead, you lose 50% of your down payment. Borrowed money amplifies both directions, and this example ignores interest and closing costs, which would cut the result further.
It ignores inflation
A return only helps if it buys more than before. The next sections show how to adjust.
Comparing Investments With Different Timeframes
These four examples use hypothetical figures to show why annualizing changes the ranking:
| Investment | Cost | Ending value | Period | Simple ROI | Annualized ROI |
|---|---|---|---|---|---|
| Certificate of deposit | $10,000 | $11,576 | 3 years | 15.8% | 5.0% |
| Index fund | $10,000 | $19,672 | 10 years | 96.7% | 7.0% |
| Rental property | $50,000 | $82,000 | 5 years | 64.0% | 10.4% |
| Small business | $25,000 | $43,750 | 2 years | 75.0% | 32.3% |
By simple ROI the index fund looks best at 96.7%. Annualized, the small business wins at 32.3% a year, but that is a hypothetical figure with much higher risk than a bank product. Always annualize first, then weigh risk and how easily you can get your money out.
What ROI Should You Compare Against?
There is no universal "good" ROI. It helps to know what low-risk and market returns look like right now. These figures are the latest available as of late September 2026:
| Benchmark | Figure | Source |
|---|---|---|
| S&P 500 with dividends, long-run average | 10.0% a year, 1928 to 2025 (before taxes and inflation) | NYU Stern (Damodaran) |
| 10-year Treasury yield | 5.26% on Sep 29, 2026 | U.S. Treasury |
| 3-month Treasury yield | 4.25% on Sep 29, 2026 | U.S. Treasury |
| National average savings rate | 0.37% on Sep 21, 2026 | FDIC |
| National average 12-month CD rate | 1.73% on Sep 21, 2026 | FDIC |
| Inflation (CPI-U, 12 months) | 3.4% through August 2026 | Bureau of Labor Statistics |
Two cautions: past stock returns are not a forecast, and the FDIC figures are national averages, so individual banks pay different rates. Rental property, small business and marketing have no standard benchmark, so compare them with what the same money and effort could earn in an index fund or Treasury note over the same period, adjusted for risk. Returns far above these benchmarks deserve hard questions about risk.
A Step-by-Step ROI Worksheet
- Total cost: purchase price plus fees, taxes, repairs and any ongoing costs.
- Total return: sale price plus income received (dividends, rent, interest).
- Net profit: total return minus total cost.
- Simple ROI: net profit ÷ total cost × 100.
- Annualize if the holding periods differ: (ending value ÷ beginning value)^(1 ÷ years) - 1.
- Adjust for taxes and inflation, then compare with the benchmarks above.
Real vs. Nominal ROI
Nominal ROI is the raw percentage. Real ROI removes inflation and shows what happened to your purchasing power:
Real ROI = ((1 + nominal ROI) / (1 + inflation rate)) - 1
With inflation at 3.4% (the 12 months through August 2026), a 5% return is worth ((1.05 ÷ 1.034) - 1) = 1.5% in real terms. Our Inflation Calculator shows what any dollar amount is worth across years, and our guide on what inflation is and how it affects your money covers the data. For how growth compounds, see Compound Interest Explained, and browse more money tools in our finance calculators.
Frequently Asked Questions
What is a good ROI percentage?
There is no single number, because it depends on risk and time. A useful test is whether an investment beats what you could earn with little effort and risk. As of late September 2026 the 10-year Treasury yielded 5.26%, and the S&P 500 has averaged 10.0% a year since 1928 with large swings, including an 18.0% drop in 2022. Compare annualized ROI with those figures, and then ask whether the extra return is worth the extra risk.
How do I calculate ROI on a rental property?
Add every cost (purchase price, closing costs, renovation, taxes, insurance, maintenance and management fees), then add the net rental income you collected and the sale price when you sell. For a quick annual view, use cash-on-cash return: annual net rental income divided by the cash you invested. For example, $8,000 of net annual rent on $100,000 of cash invested is 8%. That ignores appreciation and taxes. Our Rental Property Calculator covers those cases.
What is the difference between ROI and ROAS?
ROAS measures revenue per dollar of ad spend. If you spend $1,000 and earn $4,000 of revenue, ROAS is 4 to 1, or 400%. ROI measures profit. If those sales cost $2,000 to fulfill, net profit is $4,000 - $2,000 - $1,000 = $1,000, and ROI is $1,000 ÷ $1,000 = 100%. ROAS compares ad channels quickly, but ROI shows whether you actually made money.
Can ROI be negative?
Yes. A negative ROI means you lost money. Buy at $5,000 and sell at $3,500, and ROI is -30%. A marketing campaign with a negative ROI cost more than the profit it produced. Knowing that is useful, because it tells you to stop or change the approach.
Should I use ROI or IRR?
Use simple or annualized ROI for a single purchase and sale, such as buying a stock and selling it later. Use IRR when money moves at different times, such as a rental that pays income, needs repairs and is eventually sold. IRR accounts for timing and gives a single yearly rate for uneven cash flows. In the six-year example above, the 20% simple ROI equals an IRR of about 5.5% a year.
Sources
- Damodaran A. Historical Returns on Stocks, Bonds and Bills, NYU Stern, data through 2025, updated January 2026 (S&P 500 with dividends: 10.0% a year compounded over 1928 to 2025, and -18.04% in 2022).
- U.S. Department of the Treasury. Daily Treasury Par Yield Curve Rates, September 29, 2026.
- FDIC. National Rates and Rate Caps, September 2026.
- Bureau of Labor Statistics. Consumer Price Index news release, August 2026 (published September 11, 2026).
- IRS. Revenue Procedure 2025-32 (2026 capital gains thresholds and rates), Topic no. 409, Capital gains and losses and Topic no. 559, Net investment income tax.
All sources were checked in September 2026. This article is for education only and is not financial or tax advice.