How exactly should ROI be calculated? Master the core logic of investment return in one article

When it comes to investing, the most concern for everyone is “how much can I earn.” But how do you measure the true return of an investment? This is where the metric Return on Investment (ROI) comes into play. Many people have only a superficial understanding of how to calculate ROI. Today, we will delve into the calculation formula, practical applications, and pitfalls to watch out for.

What exactly is Return on Investment (ROI)?

ROI is a core indicator to measure the profitability of an investment, used to show how much return the invested funds can generate. Simply put, it’s how much you earned divided by how much you invested.

This metric has a wide range of applications, from personal financial decisions to measuring a company’s profitability. Whether it’s stock investments, real estate appreciation, or business advertising, ROI can help you quickly assess the efficiency of your investment.

How to calculate ROI

The basic formula for ROI is: (Revenue - Cost) ÷ Cost × 100%

Here, revenue refers to the total gains from the investment, and costs include all投入和产生的费用。让我们用实际例子来看：

假设你用100万买入某只股票，后来卖出得到130万。那么你的投资回报率就是（130-100）÷100 × 100% = 30%。

但现实中的情况往往更复杂。收入和成本的构成不像例子那么简单，需要把所有相关的成本都算进去。

How to calculate ROI for stock investments

Taking stocks as an example, the situation can be more complex. Suppose you buy 1000 shares at $10 each, sell them a year later at $12.5, and receive $500 in dividends, with transaction fees of $125.

At this point, you need to calculate separately:

• Total Revenue = Sale proceeds + Dividends = 12.5×1000 + 500 = $13,000
• Total Cost = Purchase cost + Transaction fees = 10×1000 + 125 = $10,125
• Net Profit = 13,000 - 10,125 = $2,875
• ROI = 2,875 ÷ 10,125 × 100% ≈ 28.75%

The key is to include hidden costs like fees and commissions; otherwise, the calculated ROI won’t be accurate.

Investment return in e-commerce and advertising

In e-commerce operations or advertising campaigns, the ROI calculation differs slightly.

Formula: （Sales Revenue - Cost of Goods Sold）÷ Cost of Goods Sold × 100%

For example, if the cost of goods is $100, selling price is $300, and you sell 10 items through advertising with a $500 ad spend:

ROI = （$300×10 - （$100×10 + $500））÷ （$100×10 + $500）× 100% = 100%

But here’s a common confusion: Many practitioners refer to ROI when they mean ROAS (Return on Ad Spend).

The fundamental difference between ROI and ROAS

These two metrics are often confused, but their logic is entirely different:

ROAS = Revenue generated from ads ÷ Advertising cost

Using the above example: ROAS = （$300×10）÷ $500 × 100% = 600%

The key differences:

• ROI measures profit, considering all costs
• ROAS measures revenue, only considering advertising costs

If your ROAS is 600%, but total costs (including product costs) are high, the actual ROI might only be around 100%. That’s why many ad campaigns look impressive in ROAS but yield modest profits.

Annualized ROI: considering the time dimension

A common flaw of simple ROI is that it ignores time.

Suppose Project A earns 100% in 2 years, and Project B earns 200% in 4 years. Which is better? Looking at ROI alone doesn’t tell.

This is where annualized return comes in:

Calculation formula: Annualized ROI = ((Total ROI + 1)^(1 ÷ Years) - 1) × 100%

• Project A annualized ROI = ((1 + 1)^(1 ÷ 2) - 1) × 100% ≈ 41.4%
• Project B annualized ROI = ((2 + 1)^(1 ÷ 4) - 1) × 100% ≈ 31.6%

This comparison shows that Project A has a higher annualized return and is more efficient for investment.

The differences among ROI, ROA, and ROE

Many people confuse these three indicators. They all measure returns but serve different purposes:

For example, a company with assets of $1 million, of which $500,000 is debt and $500,000 is equity, invests $100,000 in a project that earns $100,000 (total revenue $200,000).

• ROI of the project = (200 - 100) ÷ 100 × 100% = 100%
• The company’s annual net profit = $1.5 million, ROA = 150 ÷ 100 × 100% = 150%
• Same year’s ROE = 150 ÷ 50 × 100% = 300%

How to improve your own investment ROI

From the ROI formula, to increase returns, there are basically two ways: increase profit or reduce costs.

Choose high-dividend stocks: Regular income can boost total returns.

Reduce transaction costs: Use low-commission trading channels and minimize unnecessary trades.

But these are small optimizations. To truly achieve high ROI, the most direct method is precisely selecting investment targets.

Historical data shows that ROI varies significantly across asset classes: Cryptocurrencies, Forex > Stocks > Index Funds > Bonds

But note that high ROI often comes with high risk. If a certain coin’s volatility is much higher than stocks, you can balance your portfolio—use smaller positions for high-ROI assets and larger positions for stable ones.

Additionally, when choosing investments, consider valuation. When comparing similar products, lower PE percentiles tend to be less risky and offer greater potential returns.

Common pitfalls when using ROI

Although ROI is a widely used metric, it has several limitations:

First, ignoring the time factor

Project X’s ROI is 25%, Project Y’s is 15%. At first glance, X seems better, but if X takes 5 years to achieve that return and Y only 1 year, Y’s efficiency is higher. That’s why annualized ROI is necessary for comparison.

Second, high ROI ≠ low risk

Projects with high ROI often have high volatility. If you only look at the ROI number and ignore risk, you might face significant losses in the first year and panic-sell.

Third, ROI can be overestimated

If not all costs are included in the calculation, the ROI will be artificially inflated. For example, in real estate investment, you need to account for mortgage interest, taxes, maintenance costs; otherwise, the actual ROI will be much lower than expected.

Fourth, ROI only focuses on financial metrics

Like many profit indicators, ROI emphasizes numerical returns and may overlook social benefits, environmental impact, and other non-financial gains. This can lead to undervaluing long-term projects’ true worth.

Summary

ROI is the most straightforward indicator to assess investment efficiency, but it’s not万能的。When choosing investments, you should consider not only high ROI but also the time horizon, risk level, and cost structure to make more rational decisions.