What is ROI? How to calculate return on investment

Published Tuesday 21 April 2026

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• What are the limitations of ROI?
• What are the benefits of measuring ROI?
• Common ways to improve your ROI
• Make ROI work for your small business
• FAQs on ROI

Key takeaways

• Calculate ROI using this simple formula: subtract your investment cost from your total return, divide by the investment cost, then multiply by 100 to get a percentage that shows whether your spending is generating profit.
• Aim for 15–25% annual ROI on major investments as a general benchmark, but adjust your target based on your industry, the level of risk involved, and how long the investment will take to pay off.
• Avoid relying on ROI alone when making decisions, as it does not account for hidden costs, the time value of money, or qualitative benefits like brand reputation — pair it with cash flow analysis and payback period for a fuller picture.
• Improve your ROI over time by setting specific targets before you invest, tracking performance regularly, and testing small-scale investments before scaling up the approaches that deliver results.

What is return on investment (ROI)?

Return on investment (ROI) is a financial ratio that measures how much profit you generate from an investment compared to its cost. It shows which investments create value, helping you make confident spending decisions.

ROI helps you evaluate common business decisions, including:

• Comparing new locations or equipment: Assess potential returns before committing funds
• Measuring marketing effectiveness: Identify which campaigns drive profitable growth
• Analysing vendor costs: Determine if switching suppliers saves money
• Justifying hiring decisions: Calculate if new staff will generate enough revenue to cover their cost

ROI expresses profitability as a percentage of your investment cost. It differs from rate of return (ROR), which factors in a specific time period. Basic ROI considers only what you spent and what you earned.

How to calculate ROI

To calculate ROI, you need two numbers: your initial investment cost and the total return from that investment.

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

Net profit equals your total return minus the cost of the investment.

ROI calculation example:

A kombucha company spent $4,000 on advertising and generated $6,500 in new sales.

1. Calculate net profit: $6,500 (new sales) − $4,000 (investment cost) = $2,500
2. Apply the ROI formula: ($2,500 ÷ $4,000) × 100 = 62.5%
3. Interpret the result: For every dollar spent on advertising, the company earned $0.63 in profit

A 62.5% ROI indicates the campaign was profitable and worth repeating.

Accounting software can help you calculate your ROI.

What is a good ROI?

A good ROI for small businesses is typically 15–25% annually on major investments. However, your target depends on several factors.

When setting ROI expectations, consider:

• risk level: Higher-risk investments should deliver higher returns to justify the uncertainty
• business goals: Strategic investments may accept lower ROI for long-term positioning
• industry standards: Compare your results to similar businesses in your sector
• timeframe: Short-term projects often need higher ROI than long-term investments

What are the limitations of ROI?

ROI shouldn't be your only decision-making tool because it doesn't capture the full picture. Key limitations include:

• Time value of money: A 20% ROI over one year differs significantly from 20% over five years
• Hidden costs: Depreciation, maintenance, and financing costs aren't reflected in basic calculations
• Qualitative benefits: Brand reputation, customer loyalty, and employee satisfaction drive long-term success but can't be measured in ROI
• Risk assessment: ROI doesn't indicate how likely you are to achieve projected returns

Pair ROI with cash flow analysis, payback period, and your business goals for better decisions.

What are the benefits of measuring ROI?

Measuring ROI gives small businesses three main benefits:

• Simple decision-making: Positive ROI means profit and negative ROI means a loss, making results easy to interpret
• Investment comparison: Compare different opportunities using the same metric to choose the best option
• Stakeholder communication: Show investors and lenders concrete evidence of business performance and growth potential

For New Zealand small businesses, the Inland Revenue (IRD) allows you to prepare your company's financial statements to the minimum if your total income is $33 million or less. New Zealand companies with ten or more shareholders, or those with an annual revenue of more than $33 million, must prepare financial accounts to a higher standard, making ROI documentation particularly valuable.

You can use ROI analysis before making investments to determine viability and after completion to measure success.

Common ways to improve your ROI

You can improve your ROI by:

• setting measurable targets: Define specific ROI goals before investing, such as "achieve 20% ROI within 12 months"
• tracking performance regularly: Monitor monthly or quarterly to spot trends and adjust strategies quickly
• using accounting software: Automate data collection to calculate ROI accurately and consistently
• making decisions based on data: Let ROI results guide future investment choices rather than relying on intuition
• testing and optimising: Start with small investments, measure results, then scale successful approaches

Make ROI work for your small business

ROI analysis helps you make confident investment decisions and grow your business profitably. Combined with regular profitability tracking and cash flow management, ROI becomes a powerful tool for sustainable growth.

You can track ROI easily with Xero's reporting features. Get one month free and see how Xero can help you invest smarter.

FAQs on ROI

Here are common questions about ROI for small businesses.

What's a good ROI for a small business?

Most small businesses should target 15–25% annual ROI on major investments. This range varies by industry and risk level.

Compare your results to industry benchmarks using resources like Statista. Your accountant or financial adviser can provide sector-specific guidance.

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

ROI timeframes depend on the type of investment. Typical ranges include:

• marketing campaigns: 1–3 months for digital advertising, 3–6 months for content marketing
• equipment purchases: 6–18 months depending on usage and efficiency gains
• employee training: 6–12 months as skills develop and productivity increases
• new locations: 12–24 months to establish customer base and reach profitability

What if my ROI is negative?

A negative ROI means your investment cost more than it returned. Before writing it off, analyse what went wrong.

Ask yourself these questions:

• was the investment poorly planned or executed?
• were there external factors beyond your control?
• did the timing or goals misalign with market conditions?

Use these insights to improve future investment decisions.

What does a 20% ROI mean?

A 20% ROI means you earned $0.20 in profit for every $1 invested. For example, a $5,000 investment with 20% ROI returned $1,000 in profit, giving you $6,000 total.

Whether 20% is good depends on your industry, risk level, and timeframe. For most small businesses, 20% annual ROI indicates a profitable investment.