Return on Investment (ROI): What It Means & How to Compute

If you’re thinking about spending money on a small business, new equipment, or another income-generating purchase, you may wonder if the cost is acceptable.

Return on investment, or ROI, can help you compare what you put in with what you get back. But what is ROI and how do you know if your expenses were worth it?

This guide explains what ROI means, how to calculate it, how to interpret the result, and what to consider before using ROI to make a financial decision. 

Return on investment (ROI) is a simple way to measure how much you gained or lost compared with the amount of money you invested.  

A positive ROI means the investment gained value based on the figures included in your calculation, while a negative ROI means you received less than what you initially put in.

Some people search for “return of investment meaning," but the standard financial term is return on investment.

ROI can be useful when you’re comparing different ways to use your money. For example, you could use it to assess:

• Equipment purchased for a small business
• Marketing expenses intended to increase sales
• Improvements to a rental property
• Training or tools that directly contribute to business income
• Financial investments that gain or lose value

The basic idea is straightforward. You compare your net gain with your original cost.

Still, ROI doesn’t tell you everything. Investments may involve different levels of risk, costs, and time.  

Investor education guidance also stresses that investment decisions should consider your financial goals and how much risk you can reasonably accept, not just potential returns. 

The basic return on investment formula is:

ROI = (Net Gain ÷ Cost of Investment) × 100

You can calculate net gain by subtracting your total investment cost from the amount you received.

Net Gain = Final Value or Return − Total Investment Cost

Here’s a simple example.

Suppose you spend ₱20,000 on equipment for a sideline. After accounting for the income directly generated by that equipment, you determine that you received ₱25,000 in total value.

Your net gain would be:

₱25,000 − ₱20,000 = ₱5,000

Then:

(₱5,000 ÷ ₱20,000) × 100 = 25% ROI

This means your calculated gain equals 25% of your original investment.

A negative result works the same way. If the amount you receive is lower than what you spent, your ROI will be negative.

Keep your inputs consistent. Include relevant costs rather than calculating ROI using revenue alone.  

Otherwise, the percentage can make an investment appear more profitable than it really is. 

Calculating return on investment becomes easier if you break it into a few steps.

1. Add up your investment costs. Include the money you actually spent to make the investment possible. Depending on the situation, this might include the purchase price, fees, installation, repairs, supplies, or other directly related expenses.
2. Determine what you received. Identify the money earned or the value of the investment at the point you’re measuring it.
3. Calculate your net gain or loss. Subtract your total investment cost from the amount received.
4. Divide by the original cost. Divide the gain or loss by the total amount invested.
5. Multiply by 100. This converts your result into a percentage.

For example, imagine you spend ₱10,000 on tools for a small sideline and calculate ₱12,000 in value attributable to that investment.

Your gain is ₱2,000, so:

(₱2,000 ÷ ₱10,000) × 100 = 20% ROI

Remember that this calculation shows the return based on the numbers you entered. It doesn’t guarantee that the same return will continue in the future. 

There isn’t one ROI percentage that automatically counts as "good."

The answer depends on what you invested in, how long your money was committed, what risks you accepted, and what alternatives were available.  

A higher percentage may look more attractive, but it can come with greater uncertainty.

Time can have a major impact on how meaningful an ROI figure actually is.  

A 20% return earned over several months is very different from the same percentage earned over several years. The basic ROI formula doesn’t adjust for that difference.

You should also consider factors such as:

• Risk: How likely are you to lose some or all of the money?
• Time: How long will it take before you receive a return?
• Fees and taxes: Could these reduce your actual gain?
• Inflation: Has the purchasing power of your money changed?
• Liquidity: How easily can you access or sell the investment?

For financial investments, a real return can also account for inflation and taxes, which may result in a lower return than the headline or nominal figure.

Be cautious about opportunities promising unusually high or guaranteed returns. The Philippine SEC advises investors to be wary of quick-profit schemes and to evaluate investment offers carefully. 

ROI can help you assess a purchase funded through borrowing, especially if the money will be used for something that may generate income. However, you need to include the cost of financing in your calculation.

Suppose you’re considering borrowing money to purchase equipment for a business. Your expected income from the equipment isn’t enough information on its own. You should also account for applicable interest, fees, and other borrowing costs.

You’ll also need to ask a separate question: Can you afford the repayments even if the expected return takes longer than planned or doesn’t materialize?

Borrowing creates a repayment obligation regardless of how the investment performs. Missed payments may lead to additional costs or other consequences depending on the lender and your agreement.

Before borrowing, compare the total amount you’ll repay, payment schedule, fees, eligibility requirements, and loan terms. Rates, eligibility, and conditions vary among lenders and borrowers.

If you’re applying for financing, compare repayment terms and estimated costs carefully. The Home Credit App lets you check available offers and manage your loan application conveniently from your mobile device. 

ROI is useful because it’s simple, but that simplicity also creates limitations.

First, basic ROI doesn’t automatically account for time. Two investments might both show a 15% ROI, even though one produced that result much faster than the other.

Second, your calculation is only as accurate as the figures you use. Leaving out maintenance costs, transaction fees, financing costs, or other expenses can overstate your return.

Third, ROI can’t measure every type of benefit. A laptop used for work, for example, might improve productivity without producing income that can be easily attributed to the purchase.

You also shouldn’t treat expected ROI as guaranteed ROI. An estimate is based on assumptions about future income, costs, or value, and those assumptions may change.

Use ROI as one part of your decision instead of relying on the percentage alone. Consider affordability, risk, time horizon, cash flow, and your financial goals before committing money or taking on debt. 

Q: What is the return on investment meaning in simple terms? 
A: Return on investment measures how much you gained or lost compared with how much you originally invested. It’s usually expressed as a percentage, making it easier to compare the results of different financial decisions.

Q: How do you calculate return on investment? 
A: Subtract the total investment cost from the amount you received, then divide the result by the investment cost and multiply by 100. A positive result indicates a gain based on the figures included, while a negative result indicates a loss.

Q: What does a 20% ROI mean? 
A: A 20% ROI means the calculated net gain equals 20% of the original investment amount. It doesn’t automatically tell you how long the return took, how risky the investment was, or what other expenses were involved.

Q: Can ROI be negative? 
A: Yes. ROI becomes negative if your investment loses value or the amount you receive is less than your total investment cost.

Q: Should I borrow money if the expected ROI is higher than the loan cost? 
A: Not automatically. Expected returns can change, while loan repayments remain your responsibility. Consider your repayment capacity, total borrowing cost, risks, cash flow, and the possibility that the expected income may be delayed or lower than planned. 

Return on investment (ROI) is a useful way to evaluate whether a purchase, project, or investment may be worth the cost.  

While ROI can help you compare potential gains and losses, it works best when considered alongside factors such as risk, affordability, cash flow, and time horizon. Taking a more complete view of your finances can help you make more confident money decisions.

If you're planning a business expense, equipment purchase, or other income-generating investment and need financing, explore the options available to you through Home Credit.

Download the Home Credit App today to check available loan offers, manage your application, and access financial solutions designed to help you achieve your goals.