How to Calculate Return on Investment (ROI)

If you’re planning to invest in your business, launch a product, or create an advertising campaign, you’ve probably wondered: Is all the effort and money I’m about to spend really worth it? Return on Investment, or ROI, is the metric that gives you this answer directly.

ROI shows you as a percentage how much you earned (or lost) in relation to what you invested. Although it sounds technical, it’s actually simpler than it seems—and learning how to calculate it can be the difference between running a profitable business and one that drains resources without generating value.

What Is ROI?

ROI is an indicator that compares the profit obtained with the total cost of the investment. Simply put, it helps you see whether your money is working for you and whether your strategy is truly delivering results.

For example, if you invest $1,000 and your business earns an additional $3,000, ROI expresses that benefit as a percentage. This clarity allows you to make decisions based on real data, not assumptions.

Additionally, ROI is a tool you can apply to both large investments and day-to-day decisions—from purchasing equipment to subscribing to a digital service.

‍

‍

Why Is Measuring It Important?

Calculating ROI isn’t just a financial exercise. It’s a way to answer key questions that directly impact the health and future of your business:

• How profitable is what I’m doing?
• Should I repeat this investment or look for other alternatives?
• Which channel or product generates the most revenue?
• How do I justify these expenses to partners or investors?
• Am I using my budget effectively?

When you have a clear understanding of your ROI, you can prioritize the actions that truly create value, identify where money is leaking, and plan with more confidence.

Basic ROI Formula

To calculate ROI, use this simple formula:

ROI = (Net Profit / Investment Cost) × 100

Where:

• Net Profit = Total revenue minus all costs.
• Investment Cost = The total amount you spent (production, distribution, commissions, advertising, etc.).

Quick example:

You spent $500 on advertising and generated $2,000 in sales.

Net Profit = $2,000 – $500 = $1,500

ROI = (1,500 / 500) x 100 = 300%

This means that for every dollar invested, you earned three.

What Is Annualized ROI?

One important detail: traditional ROI doesn’t account for time. Earning a 50% return in 6 months isn’t the same as earning it over 3 years.

To compare investments with different durations, you can calculate the annualized ROI, which adjusts profitability over time:

Annualized ROI = [ (1 + ROI)^(1/n) – 1 ] × 100

Where n is the number of years.

Example:

A 60% ROI over 3 years:

Annualized ROI = [ (1+0.6)^(1/3) –1 ] x 100 ≈ 17% per year

This helps you clearly see which investment delivers a more attractive yearly return.

Advantages and Disadvantages of ROI

Like any metric, ROI has strengths and limitations. It’s important to be aware of both so you can use it wisely.

Advantages:

• Easy to calculate and understand.
• Lets you compare projects directly.
• Helps prioritize investments with the highest financial impact.
• Applicable to any industry.

Disadvantages:

• Doesn’t consider time (unless you calculate annualized ROI).
• Doesn’t account for risk or external factors.
• May not reflect intangible benefits (e.g., reputation, brand positioning).
• Requires detailed cost records to be accurate.

That’s why it’s a good idea to complement ROI with other indicators like Net Present Value (NPV) or Return on Equity.

The Difference Between ROI and ROAS

It’s common to confuse ROI with ROAS, but they’re not the same:

🔹 ROI measures the total profitability of an investment, considering all costs (labor, logistics, commissions, taxes).

🔹 ROAS focuses only on the return on advertising spend—how much revenue is generated for every dollar spent on ads.

Quick example:

You spent $2,000 on advertising and generated $10,000 in sales.

ROAS = (10,000 / 2,000) x 100 = 500%

ROI = Includes all additional costs to show the real profit.

‍

‍

How to Improve Your ROI

If your ROI is below expectations, here are some ideas that can help you optimize it:

• Reduce costs by renegotiating with suppliers or automating processes.
• Better segment your campaigns to reach the right audience.
• Train your team to increase productivity.
• Analyze data and experiment: test new actions and measure their impact.

Frequently Asked Questions About ROI

What percentage of ROI is good?

It depends on your industry and risk level. As a reference, any positive ROI means you earned more than you invested. Ideally, you should compare it against your goals and your industry’s benchmarks.

What should I do if my ROI is negative?

Analyze what didn’t work: was it the channel, the product, the targeting? Learn from the experience, make adjustments, and try new strategies.

Can I calculate ROI on intangible investments?

Yes, though it’s more complex. You can estimate the economic value of intangible benefits (e.g., customer retention) and add them to your revenue for a more complete calculation.

How often should I calculate ROI?

Ideally, at the end of every project or campaign. You can also review it monthly or quarterly if your business is fast-moving.

Why doesn’t ROI consider risk?

Because it’s a simple metric based only on costs and revenues. To assess risk, you can use indicators like Internal Rate of Return or scenario analysis.

Conclusion

Calculating ROI isn’t complicated, but it is essential. It gives you a clear view of whether your investments are creating value or if you need to rethink your strategy. Remember that ROI is just one part of financial analysis—complement it with other indicators and a long-term perspective.

At Openbiz, we help entrepreneurs around the world make smart decisions, optimize resources, and build sustainable businesses. If you’d like us to guide you in planning and measuring your investments, contact us today and discover how we can help you grow.

‍