What Is Return on Investment (ROI)? Formula, Uses, and Limits

Return on investment (ROI) compares what an investment gained or lost with what you put in. Subtract the amount invested from the value at the end, then divide by the amount invested. Multiply by 100 to show it as a percentage. An ROI of 45% means the investment returned your money plus 45% of it; a negative ROI means you got back less than you put in.

Billed publishes this page. The formulas below come from the open textbook Contemporary Mathematics (OpenStax), section 6.7, Investments, opened on October 29, 2026. This is general information, not financial, accounting or tax advice; ask your accountant where judgment is needed.

The ROI formula

OpenStax gives the formula as ROI = (FV − P) ÷ P, where P is "the initial value" and FV is "the value at the end of the investment".

• Net gain: FV − P, the amount the investment gained (or lost, if it's negative).
• ROI: the net gain divided by P.
• As a percentage: ROI × 100.

OpenStax also notes the formula's main limit: "this formula does not take into account how long the investment took to reach its current value."

Adding time: the annual return

To compare investments held for different lengths of time, OpenStax converts ROI to an annual rate. "The annual return is the average annual rate, or the annual percentage yield (APY) that would result in the same amount were the interest paid once a year."

Annual return = (FV ÷ P)^(1 ÷ t) − 1, where t is the number of years. Multiply by 100 for a percentage.

A 45% ROI earned over one year is an annual return of 45%. The same 45% earned over three years is an annual return of about 13.2%, as the example below shows.

Applying ROI to a business purchase

OpenStax's examples are bonds, stocks and funds, where the final value is what the investment is worth at the end. For equipment, a campaign or software, you decide what goes into each side:

• P, the amount invested: everything you paid to get the investment working, such as the price, delivery, setup and training.
• FV, the value at the end: what the investment gave back by the end of the period, such as the extra profit it brought in (not extra revenue, since the costs of earning that revenue have to come out first) plus anything it's still worth or sold for.
• The period: the same start and end dates for both sides, so you can work out the annual return.

Write these choices down before you calculate. Two people can get very different ROIs for the same purchase by counting revenue instead of profit, or by leaving out setup costs.

Worked example: a delivery van

The business and figures here are a sample, invented for this example.

A bakery buys a used delivery van so it can take wholesale orders.

1. Amount invested (P): $12,000, including the price and registration.
2. What the van gave back over 3 years:
   • extra profit from wholesale orders, after fuel, insurance and repairs: $14,400;
   • sale of the van at the end of year 3: $3,000;
   • value at the end (FV): $14,400 + $3,000 = $17,400.
3. Net gain: $17,400 − $12,000 = $5,400.
4. ROI: $5,400 ÷ $12,000 = 0.45, or 45%.
5. Annual return: ($17,400 ÷ $12,000)^(1 ÷ 3) − 1 = 1.45^(1 ÷ 3) − 1 = 0.1319, or 13.2% (rounded).

Reading it: the van returned its cost plus 45% over three years. The annual return formula assumes the whole $17,400 arrived at the end, but here the profit came in during the three years, so treat 13.2% as an approximate yearly figure for comparing with other uses of the $12,000. The ROI calculator works out the same percentage from the amount invested and the final value.

What ROI leaves out

• Time. Basic ROI is the same whether the gain took one year or ten. Use the annual return when lengths differ.
• Risk. ROI measures a result or an estimate. It doesn't show how likely the estimate is, so compare your forecast with what actually happened once the period ends.
• What would have happened anyway. Count only the profit the investment added. If some of those sales would have come in without it, leave them out.
• Value that isn't in the numbers. Training, safety or compliance spending can matter even when its ROI is hard to measure.

Comparing ROI between options

There's no single ROI figure that counts as good for every business or purchase. What matters is how one option compares with the others open to you, over the same period and with the same rules for P and FV:

• Put each option's ROI and annual return side by side.
• Include the option of not investing, such as keeping the cash or paying down a loan.
• Check how sensitive each result is to your estimates, for example with lower extra profit.
• Ask your accountant how taxes and financing change the comparison.

ROI and other return measures

• Return on total assets and return on equity divide net income by average assets or average equity. They measure the whole business, not one purchase. See financial ratio analysis.
• Return on sales compares profit with revenue. See return on sales.
• Profit and margins come from your profit and loss statement, including net income and operating margin.
• Cash matters as well as return. An investment can show a positive ROI and still strain cash while you wait for it to pay back; see free cash flow.

Where Billed fits

Billed publishes this page and the ROI calculator. Billed's financial reporting page says "See how profitable your business is with Income vs Expense report." Comparing income and expenses before and after a purchase is one way to estimate the extra profit that goes into FV. Working out what to count, and how taxes and financing affect the result, is something you do yourself or with your accountant.

When this guide isn't for you

This page covers simple ROI and annual return for small business decisions. For investments with cash coming in and going out over several years, financed purchases or anything involving securities, ask an accountant or financial professional about discounted cash flow methods.

Related articles

• ROI calculator
• What Is a Profit and Loss Statement?
• What Is Net Income?
• What Is Financial Ratio Analysis?
• Return on Sales
• What Is Operating Margin?
• What Is Free Cash Flow?
• What Is the Inventory Turnover Ratio?

Frequently Asked Questions

What is the formula for return on investment?

ROI = (FV − P) ÷ P, where P is the amount invested and FV is the value at the end. Multiply by 100 for a percentage. For example, $12,000 invested that returns $17,400 gives an ROI of 45%.

Can ROI be negative?

Yes. If the value at the end is less than the amount invested, the net gain is negative. For example, $12,000 invested that returns $9,000 gives an ROI of −25%.

Does ROI account for how long the money was invested?

No. Basic ROI depends only on the starting and ending values. To compare investments of different lengths, convert each to an annual return: (FV ÷ P) raised to the power of 1 ÷ years, minus 1.

What is a good ROI for a small business?

There's no single figure that fits every business. Compare the ROI and annual return of each option, including keeping the cash, over the same period and with the same rules for what counts as cost and gain, and ask your accountant.

What is the difference between ROI and profit?

Profit is an amount in dollars. ROI is a ratio that compares the gain with the amount invested, so a small investment with a modest profit can have a higher ROI than a large investment with a bigger profit.