What Is ROI (Return on Investment)?

Written by Jim Norris · NorrisAI AlphaLens · Updated August 2026

Quick answer: Return on investment (ROI) measures what you gained or lost on an investment relative to what you put in, expressed as a percentage. If you invested $10,000 and it grew to $13,000, your ROI is 30%. It's one of the most basic measures of investment performance — and one of the most misused when time isn't factored in.

The basic formula

ROI = (Current Value − Cost of Investment) ÷ Cost of Investment × 100

If you bought 100 shares at $50 ($5,000 total) and they're now worth $65 each ($6,500 total), your ROI is ($6,500 − $5,000) ÷ $5,000 × 100 = 30%.

Why time matters — annualized ROI

A 30% ROI sounds great. But did it happen in 6 months or 10 years? Those are very different outcomes. A 30% return in 6 months is exceptional; a 30% return over 10 years is underwhelming — roughly 2.6% per year, below inflation.

Annualized ROI (also called CAGR — Compound Annual Growth Rate) adjusts for time:

CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1

A $10,000 investment that grew to $18,000 over 6 years has a CAGR of roughly 10.3% — a meaningful number for comparison.

ROI for individual stocks vs portfolio

Stock ROI includes both price appreciation and dividends received. A stock that rose 15% but paid 3% in dividends delivered an 18% total return. Always include dividends when calculating stock ROI — ignoring them understates the return, especially for income-oriented stocks held over many years.

Return on equity — a different ROI that matters for stock analysis

When analyzing individual companies, investors also look at Return on Equity (ROE) — net income divided by shareholders' equity. ROE measures how efficiently a company generates profit from its equity base. A company consistently earning 20–25% ROE is creating significant value for shareholders; one earning 6% is barely covering its cost of capital.

Warren Buffett has described return on equity as the single most important metric for evaluating management performance — more informative than EPS growth, which can be manufactured through buybacks and accounting. High, sustainable ROE without excessive leverage is the hallmark of a genuinely great business.

Professor Aswath Damodaran of NYU Stern Business School places return on invested capital (ROIC) — a close relative of ROE — at the center of value creation analysis. A company that earns returns above its cost of capital creates value; one that earns below it destroys value, regardless of how fast it grows. — Investment Valuation, Wiley

Benchmarking your ROI

A stock ROI only means something relative to alternatives. If your stock returned 8% annually but the S&P 500 returned 12% over the same period, you underperformed despite making money. Always compare your returns to the relevant benchmark — the market, the sector, or what you could have earned in an index fund.

ROI limitations

Ignores risk. Two investments with the same ROI can have very different risk profiles. An 8% return from a diversified index fund and an 8% return from a concentrated speculative bet are not equivalent outcomes.

Ignores time without annualizing. Raw ROI without time context is almost meaningless for comparison.

Doesn't account for taxes and fees. Pre-tax ROI overstates what you actually keep.

How AlphaLens connects to ROI

The Fair Value Stress Test estimates what return you can expect from a stock at today's price under different scenarios. The Management Quality Scorecard evaluates whether management is generating strong returns on the capital they deploy. Together they help you assess whether a stock offers an attractive risk-adjusted ROI before you commit capital.

Where to go deeper

For a detailed walkthrough of each research framework, see the complete guide to all 15 AlphaLens frameworks.

For definitions of investing terms, see the AlphaLens investing glossary.