How to calculate return on investment
ROI = (amount returned − amount invested) ÷ amount invested × 100
A $2,000 tent, display and signage that brings in $2,600 of extra profit over a season returns $600, an ROI of 600 ÷ 2,000 × 100 = 30%.
Use profit, not sales
Measure the extra profit an investment brings, not the extra sales. If a $500 ad campaign brings in $1,500 of sales on products with a 40% margin, the extra profit is $600, so the ROI is 20%, not 200%. See revenue vs profit for why the difference matters.
Annualized ROI
A return over several years looks bigger than it is per year. $1,000 that grows to $1,210 over 2 years is a 21% total return, but a 10% annualized return, because 1,000 × 1.10 × 1.10 = 1,210. Enter the number of years to see both.
Payback period
For equipment, it’s often clearer to ask how long it takes to pay for itself. An $1,800 espresso machine that adds $150 of profit a month pays for itself in 1,800 ÷ 150 = 12 months. After that, the extra profit is yours.
What ROI doesn’t tell you
- Time: 30% in a month and 30% over five years are very different. Use the annualized figure.
- Cash: a good ROI can still strain cash flow if the money goes out long before it comes back. See cash flow for small businesses.
- Risk: estimates of future profit are guesses. Compare a cautious and a hopeful case.
To see how many sales you need to cover a new fixed cost, use the break-even calculator.
Frequently asked questions
How do I calculate ROI?
ROI = (what you got back − what you spent) ÷ what you spent × 100. Spending $2,000 to earn $2,600 is a 30% ROI.
What is annualized ROI?
The yearly rate that would grow your cost into the final value over the period. $1,000 growing to $1,210 over 2 years is a 10% annualized return.
What is a payback period?
How long the extra profit takes to cover the cost. A $1,800 espresso machine that adds $150 of profit a month pays for itself in 12 months.