What is ROI?
ROI (Return on Investment) is a metric that measures the return of an investment relative to its cost. It's one of the most used metrics to evaluate if an investment is worthwhile.
Interpretation:
- • ROI 100% = You doubled your money
- • ROI 50% = You gained half of what you invested
- • ROI 0% = You neither gained nor lost
- • ROI -20% = You lost 20%
ROI vs Other Metrics
• ROI: Simple, % return on investment
• IRR: Discount rate that makes NPV = 0 (better for complex flows)
• Payback: Time to recover investment (doesn't consider total gain)
• NPV: Net present value (considers time value of money)
When to use each?
- • ROI: Quick comparisons, simple investments
- • IRR: Projects with multiple cash flows
- • Payback: When liquidity/quick recovery matters
- • NPV: Complex business decisions
How to Use the Calculator
For Simple ROI:
- 1. Select "Simple ROI"
- 2. Enter how much you invested (e.g.: $50,000 in renovation)
- 3. Enter how much you gained/returned (e.g.: sold for $70,000)
- 4. Enter period (e.g.: 2 years)
- 5. Add costs if any (e.g.: $2,000 in taxes)
- 6. See your ROI!
For Investments with Cash Flow:
- 1. Select "Cash Flow"
- 2. Enter initial investment
- 3. Fill in inflows and outflows per period
- 4. See ROI, IRR and payback
To Compare Options:
- 1. Select "Compare"
- 2. Add up to 3 options with their data
- 3. See comparison table and chart
- 4. Decide which is best!
Practical Examples
Training Course
- • Investment: $3,000 (course)
- • Return: Salary increase $1,000/month for 12 months = $12,000
- • Period: 1 year
- • ROI: 300%
- Interpretation: Excellent return!
Property Renovation
- • Investment: $50,000 (renovation)
- • Property value before: $300,000
- • Value after renovation: $380,000
- • Gain: $80,000
- • Costs: $5,000
- • ROI: 50% in 6 months
- • Annualized ROI: ~100%
- Interpretation: Great return
Marketing Investment
- • Investment: $10,000 (campaign)
- • Sales generated: $35,000
- • Product costs: $15,000
- • Net gain: $20,000
- • ROI: 100%
- For every $1 invested, returned $2
When ROI Is Not Enough
ROI Limitations:
- • Doesn't consider risk: 20% ROI in stocks ≠ 20% ROI in bonds
- • Doesn't consider time: 50% ROI in 10 years ≠ 50% ROI in 1 year
- • Doesn't consider cash flow: High ROI doesn't mean good liquidity
- • Doesn't consider opportunity cost: Always compare with alternatives
Tips for Using ROI Correctly
Always annualize to compare: 30% ROI in 3 months ≠ 30% ROI in 3 years
Consider ALL costs: Taxes, fees, operational costs
Adjust for inflation: 15% ROI with 10% inflation = ~4.5% real ROI
Compare with alternatives: Good ROI compared to what?
Risk matters: 25% ROI in crypto vs 10% ROI in Treasury
Time is money: Long payback means idle money
Don't chase absurd ROI: 500% annual ROI is probably a scam
Document assumptions: ROI is only as good as the assumptions
Frequently Asked Questions
What ROI is considered good?
Depends on investment and risk. Generally: >20% per year is excellent, 10-20% good, 5-10% average, <5% consider alternatives.
Does negative ROI mean loss?
Yes. ROI -10% = you lost 10% of the investment.
How to calculate ROI of investment not yet sold?
Use current market value as "return". E.g.: bought stock for $100, worth $130 today, ROI = 30% (unrealized).
Should I use ROI or IRR?
ROI for simple investments. IRR for complex cash flows (projects, business, multiple entries/exits).
How to compare ROIs from different periods?
Annualize both! 40% ROI in 2 years = ~20% per year. 15% ROI in 1 year = 15% per year.
Can I have ROI >100%?
Yes! ROI 200% = tripled money. ROI 500% = sextupled.
Does ROI consider dividends?
It should! ROI = (Appreciation + Dividends - Costs) / Investment. Include ALL gains.
What if I had monthly contributions?
Use IRR (Internal Rate of Return) instead of simple ROI. IRR considers flows at different times.
Is higher ROI always better?
Not necessarily. Consider: (a) Risk, (b) Liquidity, (c) Term. 100% ROI in 10 years may be worse than 50% ROI in 2 years.
What is IRR (Internal Rate of Return)?
IRR is the discount rate that makes NPV equal to zero. It's the real return considering all cash flows over time.