Return on Investment: The Core Metric of Every Financial Decision
Return on Investment (ROI) measures the efficiency of an investment by expressing the gain or loss relative to the amount invested. It is the most widely used financial metric across business, investing, and marketing — and one of the most frequently misused.
The Basic Formula
ROI (%) = [(Final Value − Initial Cost) ÷ Initial Cost] × 100Example
Invest £5,000, receive £7,200 after 3 years:
ROI = [(7,200 − 5,000) ÷ 5,000] × 100 = 44%Annualised ROI (CAGR)
A 44% ROI over 3 years is not the same as 44% per year. To compare investments of different durations, use the annualised rate:
Annualised ROI = [(Final ÷ Initial)^(1/years) − 1] × 100
= [(7,200 ÷ 5,000)^(1/3) − 1] × 100 = 12.9% per yearWhen ROI Is Misleading
- Ignores time: 44% in 3 years ≠ 44% in 1 year
- Ignores risk: Two investments with the same ROI can have very different risk profiles
- Ignores cash flows: Doesn't account for intermediate dividends or costs
- No inflation adjustment: A 5% nominal ROI in 4% inflation = 1% real return
ROI for Business Decisions
For marketing spend: ROI = (Revenue from campaign − Cost) ÷ Cost × 100. A campaign costing £2,000 that generates £8,000 revenue has 300% ROI. For capital investment decisions, Internal Rate of Return (IRR) is more accurate than simple ROI as it accounts for the timing of cash flows.
Calculate your investment return: Free ROI Calculator