ROI explained: how to calculate return on investment

Published Monday 30 March 2026

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• ROI metrics for specific business activities
• What are the benefits of using ROI measurement?
• What are the limitations of ROI?
• Additional considerations for small businesses
• Common ways to improve your ROI
• Harness ROI for your business
• FAQs on ROI

Key takeaways

• Calculate ROI using the formula (Net Profit ÷ Cost of Investment) × 100% to measure whether your investments are profitable and compare different opportunities objectively.
• Evaluate ROI within context by considering your risk tolerance, time frame, and industry benchmarks rather than chasing the highest percentage returns without regard to other factors.
• Track ROI regularly using accounting software to monitor performance monthly or quarterly, allowing you to identify what's working and redirect resources from underperforming investments.
• Recognise that ROI captures only financial returns and should be used alongside other metrics that account for intangible benefits like brand awareness, customer loyalty, and strategic alignment with your business goals.

What is return on investment (ROI)?

Return on investment (ROI) is a percentage that shows how much profit you've made compared to what you spent. It helps you measure whether an investment was worth it.

Small business owners use ROI to make decisions about:

• whether to open a new location or buy new assets
• how well a marketing campaign or project performed
• whether switching vendors would save money
• whether hiring new staff makes financial sense

ROI differs from rate of return (ROR). ROR measures returns over a specific time period, while ROI focuses only on the relationship between what you invested and what you earned.

How to calculate ROI

The ROI formula is: (Net Profit ÷ Cost of Investment) × 100%

To calculate ROI, you need two numbers:

• Net profit: the total return from your investment minus what you spent
• Cost of investment: the total amount you put in

Divide your net profit by your investment cost, then multiply by 100 to get a percentage.

Here's an ROI calculation example:

A small kombucha company wants to measure the ROI of an advertising campaign. Here's how they calculate it:

• Investment cost: $4,000 spent on ads in one month
• Revenue generated: $6,500 in extra sales from customers who clicked the ads
• Net profit: $6,500 − $4,000 = $2,500
• ROI calculation: $2,500 ÷ $4,000 × 100 = 62.5%

This means the company earned 62.5% more than they spent on the campaign.

Accounting software can help you track the information you need to calculate your ROI.

What is a good ROI?

A good ROI depends on your industry, goals, and risk tolerance. There's no universal benchmark; for example, while long-term index fund portfolios may return 7% to 10% annually, higher-risk categories like real estate or startups can promise more, but with greater volatility.

Consider these factors when you evaluate your ROI:

• Risk tolerance: higher-risk investments typically need higher returns to be worthwhile
• Alignment with goals: an investment that supports your growth strategy may be valuable even with a modest ROI
• Long-term benefits: some investments build brand awareness or customer loyalty, which fall outside immediate ROI calculations

In general, aim for an ROI that exceeds your cost of capital and compare your results to industry averages when possible.

ROI metrics for specific business activities

ROI applies differently depending on what you're measuring. Here's how to use it for common business activities:

Marketing ROI

Marketing ROI measures how effectively your campaigns, channels, and tactics generate revenue. Key metrics to track include:

• customer acquisition cost (CAC)
• return on ad spend (ROAS)
• conversion rate

Sales ROI

Sales ROI helps you assess which strategies, promotions, and customer segments drive the most value. Key metrics to track include:

• sales growth rate
• average order value (AOV)
• customer lifetime value (CLTV)

Project ROI

Project ROI evaluates whether a new initiative is financially viable before you commit resources. Key metrics to track include:

• net present value (NPV)
• internal rate of return (IRR)

Employee ROI

Employee ROI measures the return on hiring, training, and development investments. Key metrics to track include:

• revenue per employee
• employee turnover rate
• employee engagement scores

What are the benefits of using ROI measurement?

When you measure ROI, you can make smarter choices about where to invest your time and money. Here's why it's valuable for small businesses:

• Attracts investors: investors use ROI to evaluate whether your business is worth funding
• Simplifies interpretation: a positive ROI means you made money; a negative ROI means you lost money
• Applies broadly: use ROI to compare tools, products, services, or marketing channels
• Supports planning: calculate projected ROI before making an investment to assess whether it's viable

What are the limitations of ROI?

ROI measures profitability but captures only part of the picture. Keep these limitations in mind:

• Timing blind spot: ROI shows returns without indicating how long your money was tied up
• Hidden costs: factors like depreciation, financing costs, and opportunity costs fall outside the formula
• Qualitative returns: brand awareness, customer loyalty, and employee morale fall outside ROI calculations, even though they affect long-term success

Use ROI alongside other metrics. Consider risk, strategic fit, and potential non-financial benefits when you evaluate investments.

Additional considerations for small businesses

ROI tells only part of the story; context matters. Here are additional factors to weigh:

Time frame

The same ROI percentage can mean very different things depending on how long the investment took.

For example, compare these two scenarios:

• a marketing campaign with 25% ROI over one year
• equipment purchase with 25% ROI over two years

The marketing campaign delivered the same return in half the time, making it the stronger investment. Consider how to calculate ROI over different periods, such as monthly, quarterly, or annually, to get a clearer picture.

Intangible benefits

ROI captures financial returns but leaves out non-financial gains. Brand awareness, customer loyalty, and employee morale all contribute to long-term success, even though they fall outside your ROI calculation. Factor these benefits in when you assess overall value.

Risk vs reward

Higher ROI often comes with higher risk. Before chasing maximum returns, assess how much you can tolerate potentially losing. Choosing a moderate ROI with lower risk may be smarter for your business.

Common ways to improve your ROI

To improve your ROI, start by tracking better and deciding smarter:

• Set clear goals: define specific, measurable objectives for each investment
• Track results regularly: monitor how things perform monthly or quarterly to spot trends early
• Use accounting software: tools like Xero provide the data you need to measure what's working
• Let ROI guide you: prioritise investments that consistently deliver strong returns
• Experiment strategically: test new approaches on a small scale before you commit more resources

Harness ROI for your business

When you understand ROI, you can make confident decisions about where to invest your time and money. When you measure returns consistently, you can identify what's working, stop what's underperforming, and grow your business with clarity.

Xero's accounting software helps you track your investments and calculate ROI, so you can focus on running your business. Get one month free and see how easy financial management can be.

Use ROI alongside other metrics. Analysing profitability and managing cash flow are equally critical for small business success.

FAQs on ROI

What's a good ROI for a small business?

A good ROI exceeds your cost of capital and compares favourably to your industry average. Benchmarks vary by sector, so check resources like Statista or consult your financial advisor to find relevant figures to compare.

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

The timeline depends on the investment type. Marketing campaigns may show returns within weeks, while equipment you purchase or employees you train often take months or years to pay off.

What if my ROI is negative?

A negative ROI means your investment lost money. Analyse what went wrong, whether you planned poorly, faced external factors, or used a flawed strategy, and use those insights to make better decisions next time.

Is a higher ROI always better?

Not necessarily. Higher ROI often comes with higher risk. A 50% return on a volatile investment may be less valuable than a steady 15% return with minimal risk. Consider how much risk you can tolerate and how stable your business is when you evaluate investments.

How is ROI different from rate of return?

ROI measures the total profit relative to your investment cost, regardless of time. Rate of return (ROR) calculates returns over a specific period, which helps you compare investments held for different lengths of time.