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Anonymous A

on Feb 18, 2025

Global

Hi, I am confused about what exactly is the formula for ROI. Is it (Profit-Cost)/Cost (see picture 1) or Profit/Cost (see picture 2)? Both cases are from Darden and googling online both equations show up. Thank you a lot!

Picture 1 (fireproof)

Picture 2 (Big Shot 2020)

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Top answer

Mattijs

Coach

on Feb 18, 2025

Free 15m intro call | First session -50% | Bain| Hiring team | 250+ successful candidates

Hi,

ROI is the return on investment, so the gains (profit) over the investment (cost). The ROI does not have a unit (so no dollar value). The ROI is positive if the number is higher than 1 (meaning you have more gains vs. costs).

Some books use the alternative definition of ROI (profit/cost -1). In that case, a ROI is positive if the outcome is >0. Let me know if you have other questions.

Mattijs

Alessa

Coach

on Feb 20, 2025

xMcKinsey & Company | xBCG | xRB | >400 coachings | feel free to schedule an intro call for free

hey!

The correct formula for ROI in the context you're looking at is Profit / Cost (as shown in Picture 2). This is a common approach in financial analysis to assess how much profit is generated for each dollar of cost. The formula you mentioned from Picture 1, (Profit - Cost) / Cost, is another variation but is less commonly used in the industry.

Alessa

Thabang

Coach

on Mar 01, 2025

Ex-McKinsey Consultant | McKinsey Top Coach & Interviewer | Special Offer: Buy 1 Session Get 1 Free (Limited time!)

Hey there,

The technically correct answer is the second one there, where ROI is the Profit / Investment Cost

The name "Return on Investment" can be used as a guide to help you remember or know what you should be looking for.

The challenge is when the question wants a net cashflow impact instead of profit. That is when you get number 1 (which is not technically correct). And for this reason, clarifying your approach is critical and is what can help you not get into a sticky situation

All the best

Pedro

Coach

on Mar 13, 2025

Bain | EY-Parthenon | Former Principal | 1.5h session | 30% discount 1st session

It should be: Profit / Investment

In this case: (Annual Revenue - Annual Cost) / Initial or Upfront Cost