What is return on investment?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Return on investment, or ROI, is a measure of how much profit an investment produces compared with what it cost. It is worked out by dividing the net profit from the investment by its cost, and is usually expressed as a percentage. A higher figure means each dollar invested has earned more profit over the period measured.
ROI is a calculation, not an account in the books. Use the net profit attributable to the investment over the period being measured, together with its full cost. Whole-business profit from the profit and loss statement may be relevant when assessing the whole business; a particular machine or project needs its own supported figures for the benefits and costs attributable to it. Your accountant can help identify those amounts and any shared costs to include.
ROI figures can only be compared when they are worked out the same way: over the same length of time, using net profit rather than revenue, and counting the full cost of the investment, including delivery, installation and set-up.
In Australia
business.gov.au's glossary describes ROI as a calculation of how efficiently a business generates profit from the equity its owners and shareholders originally put in. To work it out, it divides what the investment earned in net profit by what it cost, then turns the result into a percentage.
Its page on valuing a business names return on investment as one of the common valuation methods. Used this way, the business's net annual profit is set against a selling price: an owner can work out the ROI at a price they have in mind, or set a target ROI and work back to the price.
Worked example
| Item | Amount (AUD) | As a decimal |
|---|---|---|
| Cost of the equipment, including installation | 60,000.00 | |
| Net profit from the equipment in the year | 15,000.00 | |
| Return on investment (net profit divided by cost) | 0.25 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Using revenue instead of net profit, which makes the return look much larger than it is.
- Leaving part of the cost out, such as delivery, installation or training, so the return is overstated.
- Comparing a return measured over a few months with one measured over a full year.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Value your business
business.gov.au, Australian Government. Current at 16 October 2026, released 11 July 2024. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.