What is a Good ROI and How To Calculate It

By Indeed Editorial Team

February 22, 2021

Investors, marketers and business owners use many tools and equations when determining the financial stability of an investment opportunity, such as the return on investment percentage (ROI). ROI gives individuals the ability to understand the value of an investment or business which can be helpful when making important purchases in stocks, technology, businesses and more. In this article, we discuss what return on investment is, why it's important and how to calculate it.

What is ROI?

Return on investment (ROI) is a calculation to determine how well an investment, or group of investments, may perform and how profitable it is to those investing. Personal investors and investment firms might use ROI to help make important investing decisions, and businesses might use ROI to calculate if marketing and large equipment expenses will benefit their overall revenue. New companies might also incorporate an ROI percentage in their business presentations to help attract investors into financing their ideas.

Related: How to Make a Business Presentation Plan

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, meaning a business might not succeed or new equipment might add to heavily to a company's expenses, it can be important for seek an opportunity that offers a higher return on investment to provide more security to businesses and help convince them to invest.

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, if a business is investing in something for the first time, like new technology, they will want to understand what the highest return on investments have been for other companies with this technology and if the market is currently lucrative enough to invest in.

How to calculate ROI

Return on investment = (investment value - investment cost)/investment cost

Here are three steps you can follow in order 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, they 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 however much a company is willing to contribute or pay 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 the investor decides to spend $600 instead of $100, $600 that would be the new cost of the investment.

3. Apply formula

The last step is to take the two numbers you've determined and apply them to the 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 they receive $150 for their 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%

What is a good 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 will 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 will take a longer amount of time before investors receive any money back, and for investments with a lower ROI percentage, investors can expect to see a return fairly soon. This can sometimes lead investors to find or negotiate 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. This slightly lowers the value of the return for the investor, but they will also receive it a little sooner.

Small businesses

Small businesses often have to calculate ROI percentages when determining if they should 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 their 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 will raise the value of the business overall, but might add heavily to the business's expenses. In these cases, it can be helpful for small businesses to seek other vendors for the equipment and technology and see if they can purchase them for a lower cost. This can help the business find the best ROI percentage that can benefit their company, or help them determine if they should make the purchase at a later date.

Related: What are Expenses?

Marketing

Marketing companies and departments often use ROI to help them figure out if marketing campaigns or advertisement purchases will benefit their company's or client's revenue. When a marketing department is deciding to launch a campaign, because of the high costs of marketing, they will often need sound research and indications that the campaign will increase their customer outreach and revenue. If the ROI is not high enough, marketing departments will often try to improve their campaign's ideas using consultants or further market research, or they may decide to start a new campaign that might have better results.

Read more: 10 Marketing Strategies to Grow Your Business

What is the current ROI for different industries?

Here is a list of industries that currently have some of the highest return on investment as of 2020, based on CSIMarket's research:

  1. Technology: 26.07%

  2. Conglomerates: 17.7%

  3. Financial: 11.91%

  4. Retail: 11.79%

  5. Basic materials: 8.46%

  6. Capital goods: 8.32%

  7. Healthcare: 7.36%

  8. Utilities: 6.42%

  9. Transportation: 5.92%

  10. Energy: 3.11%

Browse more articles