# ROI: why a 40% return can beat a 50% return, and what to count

> Return on investment is the quickest way to judge whether money was well spent, and the easiest to misuse. This guide shows the formula, why time and costs change the answer, and the difference between ROI and the ad-spend ratio marketers quote.

Published 2026-10-08 by Toolcloak. 3 minute read. Original: https://toolcloak.pages.dev/articles/roi-why-a-40-percent-return-can-beat-a-50-percent-return-and-what-to-count
Related free tool: [ROI Calculator](https://toolcloak.pages.dev/tools/roi-calculator)

Someone says they made a 50% return and someone else says 40%. Who did better? It depends on a question ROI does not ask by itself: **how long did it take?** ROI is a fast, flexible measure, and that is exactly why it is easy to bend. A few extra lines of working make it honest.

> **In short**
> - **ROI = (final value − amount invested) ÷ amount invested.** Put ₹50,000 in and get ₹75,000 out: ROI is **50%**.
> - ROI ignores time. Turn it into a yearly rate: 50% over 5 years is **8.4% a year**, while 40% over 2 years is **18.3% a year**.
> - Include **every cost**: fees, repairs, taxes. A 30% price gain on a property became **22%** after costs.
> - Marketing numbers differ: **ROAS** is revenue ÷ ad spend. A 3.5× ROAS can still be only a **13% ROI** once product cost is counted.

## The formula

> **ROI = (gain − cost) ÷ cost × 100%:** If you spent ₹50,000 and ended with ₹75,000, the net gain is ₹25,000. Divide by the ₹50,000 spent: 25,000 ÷ 50,000 = 0.5, which is 50%.

**A ₹50,000 investment that returns ₹75,000**

| Step | Amount |
| --- | --- |
| Invested | ₹50,000 |
| Gain | +₹25,000 |
| Value now | ₹75,000 |

*ROI is the gain as a share of the amount put in: ₹25,000 ÷ ₹50,000 = 50%.*

Try it: [ROI Calculator](https://toolcloak.pages.dev/tools/roi-calculator). Enter the amount invested, the final value and the time to see ROI and the yearly rate.

## Time changes everything

Compare two options. Project A turns ₹50,000 into ₹75,000 in 5 years. Project B turns ₹20,000 into ₹28,000 in 2 years. A has the bigger ROI, but it is also much slower.

**Total ROI against the yearly rate for the same two projects (%)**

|  | Rate |
| --- | --- |
| A: total ROI over 5 years | 50% |
| A: per year | 8.4% |
| B: total ROI over 2 years | 40% |
| B: per year | 18.3% |

*A wins on total ROI (50% against 40%), but B earns more than twice as much per year. The yearly rate is (1 + ROI)^(1 ÷ years) − 1.*

**Turning ROI into a yearly rate**

1. **Compute total ROI.** For B: (28,000 − 20,000) ÷ 20,000 = 0.40.
2. **Add 1 and take the root.** 1.40 raised to 1/2 (the square root) is 1.1832.
3. **Subtract 1.** 0.1832, or 18.3% a year. This is the CAGR.

This yearly figure is the same one used in [CAGR](https://toolcloak.pages.dev/articles/average-return-vs-cagr-why-20-percent-is-not-what-you-earned). Money that works faster can be reinvested sooner, which is why speed matters as much as size.

## Count every cost

A flat bought for ₹40 lakh and sold for ₹52 lakh four years later looks like a 30% gain. But buying and selling costs, repairs and brokerage came to ₹3.2 lakh. The honest gain is ₹52 − ₹40 − ₹3.2 = ₹8.8 lakh.

**Property example (₹ lakh)**

| Step | Amount |
| --- | --- |
| Sale price | 52 |
| Purchase price | −40 |
| Fees and repairs | −3.2 |
| Net gain | 8.8 |

*The headline gain of ₹12 lakh shrinks to ₹8.8 lakh after costs.*

**Same sale, three ways to measure it**

|  | Rate |
| --- | --- |
| Headline ROI (no costs) | 30% |
| Net ROI (after costs) | 22% |
| Net, per year over 4 years | 5.1% |

*A 30% headline becomes 22% after costs and only about 5.1% a year, which is below 6% inflation.*

**From headline to buying power**

|  | Value | Note |
| --- | --- | --- |
| Headline gain | ₹12 lakh | Sale price minus purchase price |
| After costs | ₹8.8 lakh | Fees and repairs of ₹3.2 lakh taken off |
| In today’s money | ≈ −₹2 lakh | ₹52 lakh ÷ 1.06⁴ = ₹41.2 lakh, less ₹40 lakh and ₹3.2 lakh costs |

*With 6% yearly inflation the sale price buys what ₹41.2 lakh buys today. That is barely above the purchase price, so after costs the real result is a small loss. See the inflation guide for how this adds up.*

> **Ask what is missing:** Has the return included fees, tax, repairs, the cost of your own time, and the interest you could have earned elsewhere? The last one is the opportunity cost. A project that earns 5% when a safe option pays 7% has a positive ROI and still a bad result.

## ROI is not ROAS

In marketing, ROAS (return on ad spend) is revenue divided by what you spent on ads. It ignores the cost of making the product, so a high ROAS can hide a thin profit. ROI counts profit.

**One ₹1 lakh ad campaign (₹ lakh)**

| Step | Amount |
| --- | --- |
| Revenue | 3.5 |
| Cost of goods (60%) | −2.1 |
| Ad spend | −1.0 |
| Profit | 0.4 |

*ROAS = 3.5 ÷ 1 = 3.5×. ROI = profit ÷ cost = 0.4 ÷ (2.1 + 1.0) ≈ 13%, or 40% if you count only the ad spend as the investment. Always say which cost base you use.*

**Four return measures that sound alike**

| Box | What it means |
| --- | --- |
| ROI | Net profit ÷ total cost. Works for any project, any time length. |
| ROAS | Revenue ÷ ad spend. Ignores product cost, so it can look better than ROI. |
| CAGR | ROI turned into a yearly rate. Use it to compare different time lengths. |
| Margin | Profit ÷ revenue. A different base from ROI, which divides by cost. |

*Always name the measure and the cost base when you quote a percentage.*

## Quick practice

1. Buy for ₹80,000, sell for ₹92,000. ROI? 12,000 ÷ 80,000 = **15%**.
2. It took 3 years. Yearly rate? 1.15^(1/3) − 1 = **4.8%**.
3. Spend ₹10,000 on ads, get ₹40,000 revenue. ROAS? **4×**.
4. Which is better: 20% in 1 year or 50% in 3 years? 50% over 3 years is **14.5% a year**, so the 1-year 20% wins.

ROI is a start, not a verdict. Add time, count all the costs and compare against what the money could have earned elsewhere.

## Frequently asked questions

### What is the ROI formula?

ROI = (final value − amount invested) ÷ amount invested, shown as a percentage. Include all costs in the amount invested.

### What is a good ROI?

It depends on time and risk. Compare the yearly rate with safer alternatives such as fixed deposits and with inflation.

### How do you annualise ROI?

Use (1 + ROI)^(1 ÷ years) − 1. For a 50% ROI over 5 years that is 1.5^0.2 − 1 = 8.4% a year.

### What is the difference between ROI and ROAS?

ROAS divides revenue by ad spend. ROI divides profit by total cost. ROAS can be high while ROI is small.

### Can ROI be negative?

Yes. If you end with less than you put in, the ROI is negative. Losing half your money is an ROI of −50%.

### Why is ROI misleading?

It ignores how long the money was tied up, risk, and often hidden costs. Use the yearly rate and net figures for fair comparisons.