Glossary · UK
What is Return on Investment (ROI)?
A simple ratio comparing the profit from an investment to its original cost, expressed as a percentage.
Full Definition
Return on Investment (ROI) is one of the most widely used measures of whether money put into something -- shares, a buy-to-let property, a business project, or marketing spend -- paid off, calculated as the gain divided by the original cost. Its strength is simplicity, but that is also its main weakness: a basic ROI figure ignores how long the money was tied up, so a 20% ROI over one year is very different from a 20% ROI over ten years, which is why annualised ROI or a comparison against Compound Annual Growth Rate (CAGR) is often more useful for multi-year investments. ROI also typically ignores tax, fees, and inflation unless explicitly adjusted for, so two investments with the same headline ROI can leave an investor with very different real returns after Capital Gains Tax, platform charges, or the effects of inflation are taken into account. Because of this, ROI is best used as a quick first comparison between options rather than the final word on which investment or business decision is better.
How Return on Investment (ROI) is calculated
ROI = ((Gain from investment - Cost of investment) / Cost of investment) x 100- Gain from investment
- Total value returned, including income and capital growth.
- Cost of investment
- The amount originally invested, including fees.
Worked example: Buying GBP 5,000 of shares that are later sold for GBP 6,000 gives an ROI of ((6,000 - 5,000) / 5,000) x 100 = 20%.