Return on Investment (ROI) – What It Means and How to Calculate It

Return on Investment, usually abbreviated as ROI, is a concept that investors often refer to when considering potential investments. But what does it actually mean? What does it consist of, how can you calculate ROI, and what exactly do investors expect? On this page, we’ll discuss the features, advantages, and disadvantages of this return on investment calculation.

Calculate Return on Investment

Return on investment literally means “return on investment,” which describes exactly what it stands for. When people ask for your ROI, they want to know the return on (previous) investments. If the investment results in a loss, the ROI is a negative number; if it yields a profit, the ROI is positive. The formula is simple:

ROI = (Expected Return / Investment Cost) × 100%

Advantage of ROI

The advantage of calculating ROI is that it allows you to see at a glance whether an investment is worth considering. Investors prefer not to pursue projects with low potential; so, if the ROI of a project, product, or service is negative, 99 out of 100 investors will not invest. ROI is also helpful for comparing multiple opportunities quickly and objectively.

Downside of ROI

A major disadvantage of ROI is that it doesn’t account for the risks involved in an investment. Business risks are measured using other financial ratios, such as liquidity and solvency, which indicate whether an investment can realistically be repaid. Entrepreneurs and investors should also consider other factors like payback period, market stability, and the overall business environment.

Calculate Payback Period

When discussing an investment with potential backers, it’s smart to calculate the payback period. For example, if someone invests €100,000 in your company, and your company’s value could triple, the investment might sound large at first. However, if that investment increases your monthly turnover by €5,000, then the payback period (ROI) is calculated as €100,000 / €5,000 = 20 months. In other words, the investor recovers the investment in less than two years — making it a far more attractive opportunity.

Ideal Return on Investment

What qualifies as a good ROI varies per industry and the company’s growth stage. For example, investors in startups may expect an average ROI of between 15% and 20%. Slower-growing companies often show lower ROI percentages. It also depends on the investor’s motivation — for example, an aunt or uncle who helps a nephew with seed capital may do so more out of goodwill than for high returns. In crowdfunding, results vary depending on the platform and project type — sometimes return is key, other times goodwill dominates.

However, when taking out a business loan or working with professional investors, the numbers matter significantly. Financial reports, projections, and documented ROI expectations must be strong and accurate. Speaking with other entrepreneurs in similar industries can also help you understand what ROI levels are realistic for investors.

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