ROI calculator

How to calculate ROI

Take what you invested away from what you got back, divide by what you invested and multiply by 100:

ROI % = (amount returned − amount invested) ÷ amount invested × 100

That covers the whole life of the investment, however long it lasted. To turn it into a yearly rate, add 1 to the ROI as a decimal, raise it to the power of one divided by the number of years, and take 1 away:

Annualised ROI = (1 + ROI) ^ (1 ÷ years) − 1

So 30% over three years is not 10% a year. Because each year's growth builds on the last, it's 1.3 to the power of a third, minus 1: 9.1% a year.

What to count on each side

The answer is only as good as the two figures that go in. On the investment side, include everything the decision cost:

• the purchase price, delivery and installation;
• training, and the hours your own staff spent choosing and setting it up;
• running costs such as service contracts and licences, unless you've already taken them off the yearly saving;
• finance costs, if you borrowed to pay for it.

On the return side, count profit, not sales. Equipment that lets you take on £100,000 of extra work at a 30% gross margin has returned £30,000, not £100,000. Add whatever the asset is still worth at the end, and leave out anything you'd have earned without it.

Worked example

Three years ago a fictional 28-person joinery company spent £40,000 on a spray booth, including installation and extraction, so it could stop sending finishing work out. The subcontractor bills it no longer pays, the profit on extra jobs and the booth's resale value today add up to £52,000. That's a £12,000 gain and a 30% ROI, the first calculator's default figures, or 9.1% a year over three years. The savings arrived steadily rather than all at the end, so the true yearly return is higher, and the directors treat 9.1% as a floor.

The company is now weighing up stock-control software: £18,000 to buy and set up, saving about £9,000 a year in staff time and written-off stock once the subscription is paid. Over four years the benefit is £36,000, the net gain £18,000 and the ROI 100%. It pays back in two years, which the payback period calculator works out directly.

How to read the answer

ROI on its own ignores time and risk, so read it with three other things:

• The annualised figure, to compare investments that run for different lengths of time.
• The gain in money. A 200% return on £500 matters less than 20% on £200,000.
• What else the money could do. Set the annualised ROI against the interest on your loan or overdraft, and against the other projects competing for the same cash.

For a project that hasn't started, every figure is a forecast. Run it again with cautious numbers and see whether the decision changes. If you're raising money for it, put the assumptions in the funding section of your business plan.

Common mistakes

• Counting sales as the return. Only the profit or saving the investment produced belongs there.
• Comparing total ROIs over different periods. 40% over five years is a lower yearly rate than 25% over two.
• Leaving out your team's time spent choosing, installing and learning the new thing.
• Counting a saving twice, once in the yearly figure and again as a separate return.
• Crediting the investment with growth you'd have had anyway. Compare with what would have happened without it, not with last year.