What Is a Good Return on Investment (ROI)? (Plus Formula)

Updated February 3, 2023

Businesses, investors and financial advisers often seek to determine the stability of an investment opportunity. One useful tool for understanding how well an asset or business might perform is ROI, or return on investment. Calculating this metric can help people plan their investments in a way that aligns with their financial goals.

In this article, we discuss what a good ROI is, explain the importance of this metric and share steps for calculating this percentage.

What is ROI?

Return on investment (ROI) is a calculation to determine how well an investment, or group of investments, may perform. Personal investors and investment firms might use ROI to help make important investment decisions, such as whether to fund a business venture or purchase stocks.

Businesses often use ROI to calculate whether marketing and large equipment expenses are beneficial to their overall revenue. New companies might also incorporate an ROI percentage in their business presentations to help attract new investors.

What is a good ROI?

While the term good is subjective, many professionals consider a good ROI to be 10.5% or greater for investments in stocks. This number is the standard because it's the average return of the S&P 500, an index that serves as a benchmark of the overall performance of the U.S. stock market.

If a business or investor invests in a specific industry, the unique market can impact the profits they yield from their initial contributions. Here's a list of industries that currently have some of the highest ROI figures as of 2022, based on CSIMarket's research:

Technology: 28.87%
Capital goods: 16.19%
Basic materials: 15.26%
Health care: 12.62%
Retail: 12.18%
Energy: 11.85%

Why is a good ROI important?

ROI is important because it can help investors and businesses understand the benefits of their current or potential investments. If an investment opportunity is risky, the stakeholder can determine whether they want to proceed with it or search for something more prosperous.

For instance, if an investor knows that funding a new business venture would disrupt their portfolio, they can opt for a more stable opportunity with an established company. Return on investment percentages can also help investors and businesses better understand the market for certain industries and how others' investments have faired.

For example, a business might have concerns about investing in new technology. It can evaluate the returns of companies that pursued similar ventures and determine if their budget can manage the risk.

How to calculate ROI

Here's how to calculate ROI:

1. Determine the value of the investment

The value of the investment is the amount of money made or promised to businesses and investors after they invest. For example, if a company is seeking investors, it might promise $150 returned for every $100 an investor spends. $150 would be the value of the investment.

In other situations, you might not be able to determine the value of the investment until later on. For example, if you purchase $300 in stocks and later sell those stocks for $500, $500 would be the value of the investment.

2. Determine the cost of the investment

The cost of the investment is how much a company contributes to an investment opportunity. Using the example listed in the first step, if a company promises $150 returned for every $100 an investor spends, $100 would be the base cost of the investment. If a company was launching a new product, the cost of investment would consider everything from research and development expenses to production and marketing costs.

3. Apply the formula

The last step is to take the two numbers you've determined and apply them to this formula:

ROI = (Investment value - Investment cost) / Investment cost

Finishing our examples from the other two steps:

If a company spends $100 on an investment opportunity and later receives $150 as a result of the investment, the return on investment would be:

(150 - 100) / 100 = 0.5 or 50%

If you spend $300 on stocks for a company and later sell those stocks for $500, the return on investment would be:

(500 - 300) / 300 = .67 or 67%

Who uses ROI?

Here are some examples of parties that use ROI A good return on investment often depends on several factors, including industry, benefits and expenses. Here are a few examples of industries and areas of investing that might use an ROI percentage and what a good ROI for them would be:

Investors

When investors are trying to determine if they should invest in a business or other investment opportunities, they often consider two key factors: the ROI percentage and the time it takes to receive an investment return.

Most often, if an investment has a high ROI percentage, it takes a longer amount of time before investors receive any money back. Investments with a lower ROI percentage often result in quicker returns.

This correlation means that investors try to find a balance between a decent ROI and a quick turnaround time. For example, if a business presents an opportunity to an investor with a 150% return on investment, but their first payment won't be for three years, the investor may request a 125% return on investment after two years instead.

The lower ROI is appealing to the investor because they receive their return quicker and can use it to fund other ventures.

Small businesses

Small businesses often calculate ROI percentages when determining whether to invest in new equipment, technology or inventory. When making these decisions, small businesses might conduct market research to determine the possible return on investment. They can calculate this return by using the company's value as the value of the investment and the expense of the equipment or technology as the cost of the investment.

Sometimes, the purchasing of new equipment or technology raises the overall value of the business but might overwhelm the business's expenses. In these cases, it can be helpful for small businesses to seek other vendors for the equipment and technology to obtain the lowest prices. This way, the business can find the ideal ROI percentage or determine if it's better to make the purchase later.

Marketing professionals

Marketing professionals can use ROI to determine whether marketing campaigns or advertisement purchases are beneficial to a client's revenue. Thorough research can justify high marketing costs and prove the campaign's ability to reach the right target audience. If the ROI isn't high enough, the marketing department might try unconventional advertising methods or appeal to new audiences without using more resources.