ROI meaning: How to calculate return on investment

Published Thursday 27 November 2025

Table of contents

• What is return on investment (ROI)?
• Why ROI matters for your small business
• How to calculate ROI
• ROI calculation examples
• What is a good ROI?
• What are the benefits of using ROI measurement?
• What are the limitations of ROI?
• ROI metrics for specific business activities
• Make better business decisions with ROI
• FAQs on return on investment (ROI)

Key takeaways

• Calculate ROI using the simple formula (Net Profit ÷ Cost of Investment) × 100 to determine whether your business investments are generating worthwhile returns.

• Apply ROI analysis to evaluate marketing campaigns, equipment purchases, new hires, and other business decisions by comparing the profit generated against the initial investment cost.

• Aim for at least 10-15% ROI as a general benchmark, but adjust your expectations based on your industry standards, risk level, and investment timeframe.

• Combine ROI measurements with other metrics like payback period and risk assessment, since ROI alone doesn't account for time factors, hidden costs, or qualitative benefits like brand reputation.

What is return on investment (ROI)?

is a percentage that shows how much profit you make compared to what you spend on an investment. It helps you decide if your investments are worthwhile.

You can use ROI to decide whether to:

• open new locations or buy equipment
• run marketing campaigns
• switch suppliers
• hire new employees

Key difference: ROI focuses on total profitability, while rate of return (ROR) measures performance over specific time periods.

Why ROI matters for your small business

Understanding your return on investment helps you see which parts of your business are making money and which aren't. It's a simple way to check if your spending on things like marketing, new equipment, or even staff is paying off.

ROI helps you invest in what works, so you can grow your business and improve your profitability.

How to calculate ROI

You can calculate ROI as a percentage using a simple formula. Here’s how:

ROI Formula: (Net Profit ÷ Cost of Investment) × 100 = ROI%

What you need:

• Initial investment cost: Total amount spent
• Total return: All income generated from the investment
• Net profit: Total return minus initial investment cost

In the formula, net profit is your total return minus your investment cost.

ROI calculation example:

A kombucha company ran a marketing campaign and wants to measure its success.

Campaign details:

• Investment cost: $4,000 in advertisements
• Generated sales: $6,500 in new customer sales
• Net profit: $6,500 - $4,000 = $2,500

ROI calculation:($2,500 ÷ $4,000) × 100 = 62.5% ROI

This means the company earned $0.63 for every dollar spent on advertising.

Accounting software can help you calculate your ROI.

ROI calculation examples

Here are two common examples of how you can use ROI in your business.

Scenario 1: A marketing campaign

A small kombucha company spent $4,000 in one month on an advertising campaign. From that campaign, they can attribute $6,500 in new sales.

• Net profit = $6,500 (Return) - $4,000 (Investment) = $2,500
• ROI = ($2,500 / $4,000) * 100 = 62.5%

This means for every dollar you spent on the campaign, you got back your dollar plus an extra 62.5 cents.

Scenario 2: New equipment

A construction business buys a new excavator for $50,000. In the first year, this machine helps them complete extra jobs that bring in $70,000 of additional revenue.

• Net profit = $70,000 (Return) - $50,000 (Investment) = $20,000
• ROI = ($20,000 / $50,000) * 100 = 40%

You generated a 40% return on your investment in the first year.

What is a good ROI?

Most small businesses aim for at least 10 – 15% ROI, though this varies significantly by industry and investment type.

What determines good ROI:

• Risk level: Higher-risk investments should deliver higher returns
• Business goals: Strategic investments may accept lower ROI for long-term benefits
• Industry standards: Compare your ROI to similar businesses in your sector
• Time frame: Short-term investments often need higher ROI than long-term ones

What are the benefits of using ROI measurement?

ROI measurement benefits help small businesses make data-driven decisions and improve profitability.

Key advantages:

• Simple interpretation: Positive ROI means profit, negative ROI means loss
• Easy comparison: Compare different investments using the same metric
• Investor confidence: Demonstrates business performance to potential investors
• Future planning: Evaluate investment opportunities before committing funds

Practical applications:

• Marketing: Which campaigns generate the best returns
• Equipment: Whether new tools increase productivity enough to justify costs
• Products: Which offerings deliver the highest profitability

What are the limitations of ROI?

ROI is a useful metric, but you should use it alongside other measures when making business decisions.

What ROI doesn't measure:

• Time factor: A 20% ROI over one year differs greatly from 20% over five years
• Hidden costs: Depreciation, maintenance, and financing costs that affect true profitability
• Qualitative benefits:Brand reputation, customer satisfaction, and employee morale improvements
• Risk levels: High-risk investments may show similar ROI to safe ones

Use ROI with other measures, such as payback period and risk, to help you make better decisions.

ROI metrics for specific business activities

Here are some key ROI metrics depending on your specific business activity.

Marketing ROI

For example, you can use ROI analysis to determine the customer acquisition cost (CAC), return on ad spend, or conversion rate.

Sales ROI

You can find more tips for increasing sales in this guide.

Project ROI

Measuring ROI helps evaluate the financial viability of new projects. It uses metrics such as net present value (NPV) and internal rate of return (IRR).

Employee ROI

For instance, a survey found 94% of employers agreed hiring certified practising accountants (CPAs) provides a competitive edge for their business.

Make better business decisions with ROI

Understanding ROI is more than just a maths exercise – it’s about making smarter, more confident decisions for your business.

Xero helps you track your numbers and calculate key metrics, so you can make more profitable decisions. Try Xero for free.

FAQs on return on investment (ROI)

Here are answers to some common questions about ROI.

How long does it take to see a return on investment?

It depends on the investment type. For example, some marketing campaigns might show investment returns within weeks, while investments in new equipment or employee training might take months or even years to generate a positive ROI.

What if my ROI is negative?

A negative ROI means your investment cost more than it generated. Analysing the reasons behind your negative ROI is essential. For example, was the investment poorly planned, were there external factors at play, or was it simply a bad decision? Use the information to improve your future investments.