How to calculate ROI: ROI calculation formula and examples

What is Return on Investment (ROI)? How is it calculated? In this article, we will explain the formula for calculating ROI and tips for achieving a high ROI, along with practical examples. It may be a bit complicated, but let's take a look together.

What is ROI (Return on Investment)?

ROI (Return on Investment) is an indicator that measures the profitability of an investment. It is widely used to evaluate the returns and profits from investments and is usually expressed as a percentage.

It is used not only for personal financial decisions but also for comparing the profitability of companies. It's a useful indicator in various situations.

How to Calculate ROI

In simple terms, the Return on Investment (ROI) is "profit ÷ investment amount × 100%". Net profit refers to the remaining money after deducting the investment costs from the income earned from the investment.

ROI calculation formula:

ROI = ( net profit / investment cost ) × 100%

For example, if you buy stocks for 1 million yen and sell them later for 1.3 million yen, the ROI is (130万円-100万円)/100万円=30%. But in reality, it's more complicated. Various factors are involved, you know.

Application of Return on Investment (ROI): Examples of ROI Calculation

Stock Investment ROI Calculation Method

For example, if you buy 1000 shares at $10 each and sell them for $12.5 each after a year, you would have made a profit of $2,500. Additionally, you earned $500 in dividends. The trading fee is $125. What would the ROI be in this case?

Let's calculate. Total revenue = $12.5 × 1000 + $500 = $13000, total cost = $10 × 1000 + 125 = $10125, which means net profit = $2875.

Dividing this by the initial investment amount of $10000 gives an ROI of 28.75%. It might be quite a good result.

How to calculate advertising ROI

Even for those who are not investors, ROI is often heard in the e-commerce and advertising industries.

Return on Investment ROI = ( Sales - Cost of Goods Sold ) / Cost of Goods Sold

For example: If the manufacturing cost of a product is $100, the selling price is $300, and 10 units were sold through advertising with an advertising cost of $500.

ROI is 【$3000-($1000+$500)】/ ($1000+$500)=100%.

However, the calculation methods may differ depending on the industry. In fact, when people in the industry say ROI, they are often referring to ROAS (Return on Ad Spend). It's a bit confusing.

Difference between ROI and ROAS

The formula for calculating ROAS (Return on Advertising Spend) is as follows: ROAS = Revenue from traffic / Cost of acquiring traffic.

While ROI is based on profit, ROAS is based on revenue. ROAS only considers advertising costs. Other costs are not included.

In the previous example, ROAS = ($300×10)/$500 = 600%. Quite different numbers come out.

Annualized ROI

The annualized return on investment (ROI) is an indicator that allows for a more realistic evaluation, taking time constraints into account. It also includes the effects of compounding.

Formula: Annualized Return (%)=【( Total Return Rate + 1)^(1/Years )-1】×100%

For example: Investment plan A has a 100% return in 2 years, while B has a 200% return in 4 years. Which one is better?

A：【(1+1)^(½)-1】×100%=41.4% B：【(2+1)^(¼)-1】×100%=31.6%

Since A has a higher annualized rate of return, it means that investing in A is more advantageous. That might be a bit surprising.

Comparison of ROI, ROA, and ROE

ROI can measure not only individual investment but also corporate investment returns. To summarize the differences between ROI, ROA, and ROE briefly:

Japanese

Formula

Meaning

ROI Investment Return Rate ROI=Net Profit/Total Investment Return on Investment

ROA Return on Assets ROA=Net Income/Total Assets Return on equity and return on debt

ROE Return on Equity ROE = Net Income / Shareholder Equity ROI from shareholder investment

For example, in a company with assets of 1 million yen, 500,000 yen is borrowed funds and 500,000 yen is shareholder contributions.

If you invest 100,000 yen in a project and receive 200,000 yen back, the ROI of that project is 100%. If the company as a whole made a profit of 1,500,000 yen that year, the ROA would be 150% and the ROE would be 300%.

How to Optimize Investments Using Return on Investment (ROI)

Looking at the ROI formula, there are only two ways to increase ROI: either increase profits or reduce costs.

If you're investing in stocks, it's a good idea to choose stocks with high dividends and use a brokerage with low fees. Reducing the number of transactions is also one strategy.

But honestly, what's more important than such superficial tricks is to choose high ROI investment targets from the beginning.

Generally, the size of ROI is in the following order: cryptocurrency and FX > stocks > index funds > bonds

However, high returns are accompanied by risks. When investing, it is advisable to also look at other indicators such as volatility and PE percentile.

For example, if the volatility of a certain cryptocurrency and a stock is 7:3, you could adjust the investment ratio to 3:7 to balance risk and return.

Valuation is also important. If the PE percentile of Index A is 70% and Index B is 50%, then Index B seems to have lower risk and a more promising future return.

Summary of High Yield Investment Methods

High returns come with high risks. So, what level of ROI is appropriate? It depends on the investor's expectations, investment amount, risk tolerance, and investment duration. It's different for everyone.

For your reference, here are a few high-yield investment methods:

1. Stock Investment

The stock market is a quite mature financial market. U.S. stocks have generated an average annual return of over 12% over the past 200 years. There are various options such as undervalued stocks and high-dividend stocks.

According to the latest data from 2025, the return calculation formula for US stocks is ( final value / initial value ) ^ ( 1/N ) - 1 (N is the number of years).

2. Gold

Gold has the functions of value preservation and increase, and is used for risk hedging. Looking at the current market, there seems to be still room for growth. In this unstable global economy, investing in gold may not be a bad choice.

3. Foreign Exchange Margin Trading

The FX market has the largest trading volume in the world. Returns can sometimes exceed 30%. With the use of two-way trading and leverage, transactions can be made 24 hours a day. However, it is also susceptible to international circumstances, making it difficult for amateurs. It is important to set appropriate take-profit points and stop-loss orders to minimize losses.

Points to Note When Using ROI

ROI is useful, but it has its limitations. The main drawback is that it does not take time and risk into account.

1. Not considering the time limit

Even if Project X has an ROI of 25% and Project Y has 15%, a simple comparison cannot be made.

If 25% of X was achieved over 5 years and 15% of Y was achieved in 1 year, then it makes a difference. It doesn't make sense unless we annualize and compare.

2. The higher the ROI, the higher the potential risk.

It is the basics of investing, but return and risk are two sides of the same coin. High ROI comes with commensurate risks.

If you invest by only looking at ROI, you might end up with unexpected results. In the worst case, you could incur significant losses.

For example, Investment A has a higher ROI than Investment B, but it is also very volatile. If there is a loss in the first year, you might get scared and withdraw.

3. The investment return rate may be overestimated.

If you do not include all costs when calculating, the ROI will appear better than it actually is.

When it comes to real estate investment, you should consider all factors such as loan interest rates, taxes, insurance, and repair costs. If you don't take these into account, the returns are likely to be overestimated.

4. Not considering other types of benefits comprehensively.

ROI only looks at financial returns. It does not include social or environmental returns, which can sometimes lead to an undervaluation of the overall value of a project.