How is Return on Investment (ROI) calculated?

• A. (Sales generated ÷ Money invested) × 100.
• B. [(Sales generated - Money invested) ÷ Money invested] × 100.
• C. (Money invested ÷ Sales generated) × 100.
• D. [(Sales generated ÷ Money invested) - 1] × 100.

Answer: (B)

ROI shows how much profit you earn for each dollar you invested, expressed as a percentage. The calculation uses net profit, which is sales generated minus the money invested, divided by the money invested, then multiplied by 100. So you get the percentage of your investment that was gained as profit.

For example, if you invest $1,000 and generate $1,200 in sales, net profit is $200. ROI = (200 ÷ 1000) × 100 = 20%.

Sometimes ROI is written as [(Sales ÷ Money invested) - 1] × 100, which is just another way to express the same calculation, since (Sales ÷ Money invested) - 1 equals (Sales - Money invested) ÷ Money invested. Forms that use (Sales generated ÷ Money invested) × 100 without subtracting the investment would reflect gross return, not net profit, and aren’t true ROI.