An article to understand how to calculate the rate of return: from beginner to expert

2025-12-24 20:35:59

What exactly is ROI? Why should you pay attention?

Return on Investment (ROI), simply put, is how much money you can earn back from your invested capital. Expressed as a percentage for easy comparison.

Core definition: ROI = (Money earned from ( - Money spent )) ÷ Money spent ( × 100%

Why focus on this metric? Because it tells you how efficient your investment is and is an important tool to measure profitability. Whether it’s stocks, real estate, advertising, or startups, this calculation is essential.

How to calculate ROI? Breakdown of the formula

The basic formula is simple, but in practice, it’s easy to make mistakes. Let’s look at some real scenarios.

Standard formula: ROI) = Net Profit ÷ Investment Capital × 100%

Where, Net Profit = Total Revenue - Total Costs

The simplest example

You buy a stock for 1 million, and later sell it for 1.3 million.

How to calculate ROI? Just apply the formula: (1.3 million - 1 million) ÷ 1 million × 100% = 30%

It sounds easy, but in real investing, there are transaction fees, handling charges, taxes, and other hidden costs, so don’t be fooled by the surface numbers.

Complete stock investment calculation

Suppose you buy 1,000 shares at $10 each, and after a year, sell at $12.5. During the year, you also receive $500 in dividends, with transaction fees totaling $125.

How to calculate ROI? You need to account for all income and costs, not just stock price changes.

Total Revenue = Sale price + Dividends = (12.5 × 1000) + 500 = $13,000
Total Costs = Initial purchase + Transaction fees = (10 × 1000) + 125 = $10,125
Net Profit = 13,000 - 10,125 = $2,875
ROI = 2,875 ÷ 10,000 × 100% = 28.75%

See? As long as you calculate each part carefully, ROI becomes clear.

How to calculate advertising ROI?

E-commerce owners and marketers often ask: How much did I earn after spending so much on ads?

Advertising ROI = (Sales Revenue - Cost of Goods Sold) ÷ (Cost of Goods + Advertising Expenses) × 100%

Example: Cost of goods $100, selling price $300, selling 10 units through ads, with $500 ad spend.

How to calculate?

Total Revenue = 300 × 10 = $3,000
Total Cost = (100 × 10) + 500 = $1,500
ROI = (3,000 - 1,500) ÷ 1,500 × 100% = 100%

In other words, for every dollar spent on ads, you netted another dollar.

But beware! There’s a common industry misconception. Many say ROI, but they actually mean ROAS (Return on Ad Spend).

ROAS only looks at revenue, ignoring costs: ROAS = Revenue ÷ Advertising Spend × 100%

Using the above example, ROAS = 3,000 ÷ 500 × 100% = 600%. Looks impressive, but this is why some marketing reports are overly optimistic compared to reality.

Time changes everything: Annualized Return

This is a trap many new investors overlook.

Suppose Project A earns 100% in 2 years, and Project B earns 200% in 4 years. B seems better, but how to compare properly?

Annualized ROI = [(1 + Total Return)^(1 ÷ Number of Years)] - 1 × 100%

Project A annualized = [(1 + 1)^(1/2)] - 1 × 100% ≈ 41.4%
Project B annualized = [(1 + 2)^(1/4)] - 1 × 100% ≈ 31.6%

So, Project A earns more per year. Ignoring time factors can lead to wrong decisions.

ROI, ROA, ROE: Don’t confuse them anymore

These three metrics evaluate returns from different perspectives.

Indicator	Formula	What it measures
ROI	Net Profit ÷ Total Investment × 100%	Profitability of invested capital
ROA	Net Profit ÷ Total Assets × 100%	Profitability of all assets (including debt)
ROE	Net Profit ÷ Shareholders’ Equity × 100%	Profitability for shareholders’ invested funds

Example: A company with assets of $1 million (including $0.5 million debt, $0.5 million equity), invested $100,000 in a project, and finally recovers $200,000, with net profit of $1.5 million.

ROI of the project = (20 - 10) ÷ 10 × 100% = 100%
ROA = 150 ÷ 100 × 100% = 150%
ROE = 150 ÷ 50 × 100% = 300%

Shareholders are happiest with ROE (up to 300%), but management should look at ROA (150%) to truly reflect overall efficiency.

How to improve ROI? Practical tips

Now that you know how to calculate ROI, the next question is: how to increase it?

The core logic is simple: Increase income or reduce costs.

( Practical tips

Reduce costs:

Choose brokers with lower fees
Decrease trading frequency
Select stocks with higher dividends

But honestly, there’s limited room to improve ROI just by cutting costs. The real breakthrough is choosing the right investment targets.

Generally, high-ROI investment options rank as: Crypto > Forex > Stocks > Funds > Bonds

High returns mean high risk. You can balance this with risk indicators. For example, if a crypto’s volatility is 7, and a stock’s is 3, you might adjust your position to 3:7, gaining profit while avoiding being scared by volatility.

) High-ROI Investment Methods

CFD Trading:
Use 20% of your capital to control 100% of the position. With $10,000, you only need $2,000 to trade. If you earn $500, the ROI is 25%. The risk is higher, suitable for experienced traders.

Forex Margin Trading:
The world’s largest market, open 24 hours. Annual returns sometimes exceed 30%. Requires sensitivity to international news and strong risk control.

Gold:
A hedge and value-preservation tool. Grew 18.4% in 2019. During economic instability, gold is a good safe haven.

Stocks:
The US stock market has an average annual return of over 12% for over 200 years. Relatively stable, suitable for long-term investors.

Is calculating ROI useless? Four major limitations of ROI

Finally, a reminder: although ROI is useful, it has obvious flaws.

( 1. Ignores time cost

Project X’s ROI is 25%, Project Y’s is 15%. But if X takes 5 years to generate that return, and Y only 1 year? Blind comparison leads to errors.

Solution: Use annualized return for comparison.

) 2. High returns come with high risk

Some investments have 40% annual returns but are extremely volatile. Gains are exciting, but a market downturn could wipe out your capital. Looking only at ROI ignores risk, often leading to total loss.

Solution: Also consider volatility, maximum drawdown, and other risk indicators.

( 3. Hidden costs are overlooked

When calculating real estate ROI, many only consider property appreciation, forgetting mortgage interest, property taxes, insurance, maintenance. These significantly reduce actual returns.

Solution: List all costs and calculate each carefully.

) 4. Focus only on financial gains

ROI measures money, but ignores social value, environmental impact, etc. Some investments have low financial ROI but high social value.

This led to the invention of “Social Return on Investment” (SROI) to address this gap.

Final words

How to calculate ROI? The formula is simple, but the real challenge lies in execution. Choosing the right investment, managing risks, and long-term persistence are far more important than the calculation itself. Don’t be fooled by a single ROI number; comprehensive evaluation leads to smarter decisions.

View Original

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.