How to Calculate Return on Investment (ROI) and Annualized ROI
Learn the standard ROI formula, how to calculate Annualized ROI across multi-year projects, and how ROI differs from Return on Ad Spend (ROAS).
Return on Investment (ROI) measures how much net profit an expenditure generates relative to its total cost. Because it is expressed as a universal percentage, decision-makers use ROI to compare completely different uses of capital—such as upgrading factory machinery, running a paid search campaign, or investing in software automation.
However, simple ROI has one major blind spot: it ignores how long it took to earn that return. Below, we cover both the simple ROI formula and the Annualized ROI formula needed for fair multi-year comparisons.
1. The Simple ROI Formula
Worked Example: Marketing Campaign vs. Total Cost
Suppose your company spends ₹2,00,000 on ad placements and ₹50,000 on agency production (Total Investment Cost = ₹2,50,000). The campaign generates ₹6,25,000 in gross revenue with a Cost of Goods Sold (COGS) of ₹2,25,000:
- Net Revenue After COGS:
₹6,25,000 - ₹2,25,000 = ₹4,00,000 - Net Profit:
₹4,00,000 - ₹2,50,000 = ₹1,50,000 - Simple ROI:
(₹1,50,000 ÷ ₹2,50,000) × 100 = 60%
Common Mistake (ROI vs. ROAS): Marketers often divide gross revenue (₹6,25,000) by ad spend (₹2,00,000) to get 3.12x (312.5%). That metric is Return on Ad Spend (ROAS), not true business ROI, because it ignores product manufacturing costs (COGS) and production overhead.
2. The Annualized ROI Formula (Accounting for Time)
A 50% total ROI earned in 6 months is terrific; a 50% total ROI that took 10 years is barely beating inflation (4.14% per year). To compare investments held for different durations, compute Annualized ROI:
Where n is the holding period in years (for months, use n = Months ÷ 12).
Comparison Across Holding Periods (₹1,00,000 Growing to ₹1,50,000 = 50% Simple ROI)
Holding Period (n) | Simple Total ROI | Annualized ROI (Compound Annual Return) |
|---|---|---|
| 1 Year | 50.0% | 50.00% / year |
| 3 Years | 50.0% | 14.47% / year |
| 5 Years | 50.0% | 8.45% / year |
| 10 Years | 50.0% | 4.14% / year |
Calculate Your Project Returns in EverySolve
Use the EverySolve ROI Calculator to compute net profit, simple ROI percentage, and annualized returns across any custom date range or holding duration. For savings and reinvestment growth projections, pair it with the Compound Interest Calculator.
Simple ROI and Annualized ROI (CAGR-equivalent) formulas verified against standard corporate finance equations. EverySolve guides are written and maintained by our engineering and editorial team to document exact formulas, file-format standards, and browser-based workflows.
Frequently Asked Questions
What does a negative ROI mean?
A negative ROI means the total cost of the investment exceeded the value or revenue returned (a net financial loss). For example, investing ₹1,00,000 and recovering ₹85,000 results in a -15% ROI.
When should I use NPV or IRR instead of ROI?
Simple and Annualized ROI work well for single-outlay, single-payout evaluations. When a multi-year business project involves uneven cash inflows each year and a high cost of capital, Net Present Value (NPV) and Internal Rate of Return (IRR) are more accurate because they discount future cash flows by the time value of money.
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