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What is ROI

Full name: Return on Investment

Also known as: return on investment, rate of return, ROI formula, how to calculate ROI, return on investment formula

Definition

ROI (return on investment) is a percentage showing what an investment earned net of its cost: the gain from it minus its cost, divided by the cost, times 100.

Why it matters

ROI shows whether money put into something came back with more.

Common mistakes

Reading ROAS as ROI, so a campaign that covers its ad spend looks profitable before the cost of the goods, fees and commissions.

Related terms

Worked exampleIllustration

The ROI of one month's paid campaign

An online shop, one month, amounts excluding VAT.

  1. Ad spend for the month.

    ₪3,000

  2. Sales from the campaign were ₪9,000, so the ROAS is 9,000 ÷ 3,000.

    3:1

  3. The goods sold cost ₪4,500, and payment and delivery fees ₪300.

    -₪4,800

  4. Return after direct costs: 9,000 minus 4,500 minus 300.

    ₪4,200

  5. Net return after the ad spend: 4,200 minus 3,000.

    ₪1,200

  6. ROI: 1,200 ÷ 3,000 × 100.

    40%

A 3:1 ROAS, a 40% ROI. If the owner spent 10 hours on the campaign, those hours are a cost too.

Illustration

From ROAS to ROI on one bridge

  1. Sales from the campaign₪9,000
  2. Cost of the goods sold-₪4,500
  3. Payment and delivery fees-₪300
  4. Return after direct costs₪4,200
  5. Ad spend-₪3,000
  6. Net return₪1,200

ROAS is 3:1 (₪9,000 of sales for ₪3,000 of ads), whatever the goods cost. ROI is 40%: the campaign earned ₪1,200 on ₪3,000.

The campaign's sales, minus the goods, the fees and the ad spend itself, is what the campaign actually earned. ROAS stops at the top line, ROI counts the whole bridge.

Formula

The numbers

₪1,200Net return after all costs
×100
₪3,000Ad spend
40%ROI
The same campaign as the bridge above, as the formula: the net return divided by what was spent, times 100.

Definition

ROI, short for return on investment, compares what an investment brought back with what it cost. The formula is the gain from the investment minus its cost, divided by its cost, times 100, as the Corporate Finance Institute writes it. The top of the fraction is the net return from this one investment, not the net profit of the whole business. The gain is counted after everything the investment required: the goods sold because of it, fees, commissions, support and the owner's own time. ROI does not say how long the return took. To compare investments of different length, turn it into a yearly rate: a 40% ROI over three years is about 11.9% a year. ROI answers "how much did the money earn", while the payback period answers "how long until it came back", two questions with two numbers. The measure comes from DuPont, where the assistant treasurer Donaldson Brown developed a formula he called return on investment in 1914.

Why it matters

Owners often confuse it with ROAS (return on ad spend), which divides sales by ad spend. The same campaign can show a 3:1 ROAS and a 40% ROI, or even a negative ROI, because ROAS ignores the cost of the goods, fees, commissions and support. ROI also hides size: 100% on ₪500 matters less than 20% on ₪50,000. There is no universal good ROI. Compare it with the alternative use of the same money, such as what a loan costs you or what the money could earn elsewhere.

Directly related: CAC, LTV, Overhead.

Formula

ROI = (Net Profit / Cost of Investment) * 100

Improvement tips

  • Count every cost the investment required: the goods, fees, commissions, support and your own hours.
  • Write the period next to every ROI, and turn it into a yearly rate when you compare investments of different length.
  • Compare an ROI with the alternative use of the same money, not with a benchmark from the internet.
  • Look at the shekels next to the percentage, because a high ROI on a small sum can matter less than a modest one on a large sum.

Common mistakes

  • Leaving your own time and the setup costs out of the investment.
  • Comparing the ROI of a three month project with a three year one without adjusting for time.
  • Calculating ROI from forecast sales instead of money actually received.
ROI vs ROAS

Related terms

MarketingIntermediate

CAC

CAC (customer acquisition cost) is what you spend on marketing and sales to win one new customer: a period's spend divided by the new customers it brought.

FinanceIntermediate

LTV

LTV (customer lifetime value) is the gross profit one customer brings over the whole relationship. You compare it with the cost of winning that customer (CAC).

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

MarketingIntermediate

ROAS

ROAS (return on ad spend) is the revenue an ad campaign brings for each shekel spent on it. It is not profit: a ROAS of 5 can still lose money after costs.

FinanceBeginner

Net Profit

Net profit is what a business keeps from revenue after every expense, cost of sales, running costs, interest and tax. It is the bottom line, not cash.

FinanceBeginner

COGS

COGS (cost of goods sold) is the cost of the goods or services sold in a period: goods, materials and direct labour. Revenue minus COGS is gross profit.

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Quick check

A campaign cost ₪3,000 in ads and brought ₪9,000 of sales. After the cost of the goods and the fees, ₪4,200 was left. What is its ROI?

Choose an answer

Frequently asked questions

Do I need to understand ROI before I start a business?
Yes. Every early purchase, equipment, a website, a campaign, is an investment, and estimating what each one returns helps you spend limited money where it comes back fastest.
When does ROI first become relevant for a new business?
At the first decision to spend money in order to make money, usually equipment or marketing before launch.
How can I estimate ROI before launching?
Estimate the net return, not the sales: what the investment will bring in, minus the cost of what you sell, the fees and your time. Divide by the investment. Treat the result as a range, and check it against real numbers after the first months.
Should I always choose the investment with the highest ROI?
Not always. Look at the risk, the amount in shekels and how long the return takes. A modest, safe return on a large sum can be worth more than a high percentage on a small one.
Why does ROI matter for a business that is already running?
It shows which campaigns, tools and hires actually pay for themselves, so you can move money from what does not to what does.
What goes wrong when a business ignores ROI?
Spending continues on activities that look busy but lose money, often a campaign judged by its sales alone. The loss shows up months later in the bank balance.
How do I calculate ROI without stopping daily work?
For each investment, write down what it cost and what it brought in net of its direct costs, once a month in the same sheet. Subtract the cost, divide by the cost and multiply by 100.
What is a good ROI?
There is no universal benchmark. A good ROI is one that beats the alternative use of the same money, such as paying off a loan or another project, over the same period and at a risk you accept.
What does ROI mean in plain words?
For every shekel you put in, how much came back on top of it. An ROI of 40% means every ₪100 returned and brought another ₪40.
What is the difference between ROI and the payback period?
ROI says how much the money earned, as a percentage. The payback period says how long it took to get the money back. An investment can have a high ROI and still take years to pay back, so look at both.
Do I need an accountant to calculate ROI?
No. The calculation takes your purchase records and your sales data. An accountant or consultant helps when it is unclear which costs belong to the investment.
What is the difference between ROI and ROAS?
ROAS divides the sales from advertising by the ad spend. ROI subtracts every cost of the investment, including the goods and fees, and divides the net return by the cost. A campaign with a 3:1 ROAS can have a 40% ROI, or a negative one.

Sources: Hagley Museum and Library, "Father of ROI" (Donaldson Brown, DuPont, 1914), checked September 2026, Corporate Finance Institute, Return on Investment (ROI), checked September 2026

Last reviewed: 2026-09-23

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