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The basic calculation
ROI is calculated by subtracting the cost of an investment from its net return, dividing by the cost, and multiplying by 100 to express the result as a percentage. For example, if a £50,000 piece of equipment generates £20,000 in net profit, the ROI is 40%.
The simplicity is its appeal: a single number lets you rank different investments or compare performance against a benchmark. It is widely used in management reporting, capital expenditure proposals, and post-investment reviews.
Where ROI falls short
ROI does not account for time. A 40% return over two years is very different from 40% over ten years, yet the ratio looks identical. For time-sensitive decisions, directors should use NPV or IRR alongside ROI.
The definition of 'return' and 'cost' can also vary. Some calculations include only direct costs; others incorporate overhead allocation, financing charges, or opportunity cost. Always clarify what is and is not included when comparing ROI figures across different sources or projects.
- Marketing ROI typically uses revenue, not net profit — check which is being quoted.
- Working capital tied up in a project is a cost that simple ROI often omits.
- Tax effects can materially alter the true return; confirm treatment with your accountant.
ROI in a lending context
When applying for business finance, a credible ROI analysis on the funded project supports the lender's understanding of how the investment will generate repayment capacity. A well-presented ROI case — with clearly stated assumptions and downside scenarios — adds substance to a funding application.
Frequently asked questions
Is ROI the same as return on capital employed (ROCE)?
No. ROCE measures how efficiently a business uses all its capital employed (equity plus long-term debt), whereas ROI is typically applied to a specific investment or project. ROCE is more commonly used for company-level profitability analysis.
What ROI is considered acceptable for a business investment?
There is no universal standard. The acceptable threshold depends on your cost of capital, risk appetite, and the alternatives available. An investment should at minimum exceed the cost of the capital used to fund it.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.