Guide 7 · Return on investment
Equipment rental ROI: how to calculate it, and what a good number is
What ROI measures, and what it does not
Return on investment answers one question: for every dollar tied up in this machine, how many cents of profit did it earn this year? It is the number that lets you compare a $48,000 mini excavator with a $110,000 telehandler with a $1.4 million crane on the same footing, and compare all three with leaving the money in the bank or paying down debt.
It does not tell you when your cash comes back. That is payback, and the two can disagree. It does not tell you whether the machine is busy, which is utilisation. And it does not tell you whether the price you are charging is above your cost floor, which is the breakeven rate. ROI is the summary at the end; those three are the working underneath it.
The formula, in one line
ROI per year = (annual rental revenue − annual cost of ownership) ÷ acquisition cost × 100
Acquisition cost is what you paid for the machine, delivered and ready to hire. Not the depreciated book value, and not the deposit.
Two decisions hide in that line. The first is what goes into the annual cost of ownership, and the answer is everything — the same seven costs used to set a rental rate. The second is the denominator. Dividing by the deposit rather than the purchase price gives a much bigger, much more flattering number, and it is a different measure with a different name. More on that below.
A worked example: a $110,000 telehandler
What it costs to own for a year
Bought for $110,000, financed 70 per cent at 8 per cent over five years, kept five years and expected to sell for $46,000 at the end. The same machine as in the payback and rent-versus-buy guides.
| Cost | Per year | How it was worked out |
|---|---|---|
| Depreciation | $12,800 | ($110,000 − $46,000) ÷ 5 years |
| Interest | $3,332 | $16,660 total interest on a $77,000 loan ÷ 5 |
| Maintenance and wear parts | $3,360 | $280 a month |
| Insurance | $2,200 | 2% of purchase price |
| Share of overhead | $3,000 | Yard, office, admin, systems |
| Annual cost of ownership | $24,692 |
What it earns, and the return
At 60 per cent time utilisation the machine is on hire 219 days a year. At a blended $200 per day on hire that is $43,800 of revenue.
($43,800 − $24,692) ÷ $110,000 = 17.4% a year.
That is a comfortable machine against a 10 per cent target. It is also, and this is the point of doing the calculation, a machine where more than half the cost is depreciation, which means more than half the answer depends on the $46,000 resale figure being right.
Now change one number
Drop utilisation from 60 to 45 per cent. Revenue falls to $32,800. The cost of ownership barely moves, because almost none of it depends on whether the machine is working.
| Time utilisation | Revenue | Profit | ROI per year |
|---|---|---|---|
| 70% | $51,000 | $26,308 | 23.9% |
| 60% | $43,800 | $19,108 | 17.4% |
| 55% | $40,200 | $15,508 | 14.1% |
| 45% | $32,800 | $8,108 | 7.4% |
| 35% | $25,600 | $908 | 0.8% |
Fifteen points of utilisation take the return from very good to below the cost of money. Twenty-five points take it to nothing. This is why a single ROI figure is not enough to decide on a purchase: you need to know how far utilisation can fall before the return disappears, which is what the what-if grid in the calculator shows.
What a good ROI target is
There is no universal figure, but there is a defensible range. Most independent fleets set a target of 10 to 15 per cent a year on acquisition cost, and the calculator on this site uses 10 per cent as its default. The reasoning is simple: the money tied up in a machine has to earn more than it would cost to borrow, plus a margin for the fact that a machine can break, sit idle, or be worth less than you thought when you sell it. At 7 or 8 per cent finance, a 10 per cent return is the floor, not the ambition.
Adjust the target for the machine. A specialist unit on long contracts, with predictable demand and a strong used market, can justify a lower target because the risk is lower. A general-hire machine competing with four other yards, where utilisation can drop fifteen points in a quarter, should carry a higher one. And be suspicious of anything above 20 per cent: it is usually a resale assumption doing the work, not the rental business.
Purchase price or deposit? Two different numbers
The telehandler was bought with a $33,000 deposit and a $77,000 loan. Divide the same $19,108 of profit by $33,000 instead of $110,000 and the return is 58 per cent. Both calculations are arithmetically correct. They answer different questions.
- ROI on acquisition cost (17.4 per cent) tells you how good the machine is as a machine. It lets you compare units regardless of how each one happened to be financed, and compare the fleet with other uses of capital. This is the number to run the business on.
- Return on the cash you put in (58 per cent) tells you how hard your own money is working. It is properly called return on equity, and it rises the more you borrow, which is exactly why it flatters heavily financed machines and why it should never be used to compare one unit with another.
Use the first for decisions about machines. Use the second, carefully, for decisions about financing. Never mix them in the same table.
Three ways ROI misleads
- It averages over the life. A five-year ROI of 15 per cent can be 25 per cent in year one and 5 per cent in year five as maintenance rises and the rate drifts down. Calculate it year by year. The calculator shows the annual return in every year of the term for exactly this reason.
- It leans on the resale value. Depreciation is the largest cost, and depreciation is just the purchase price minus what you assume the machine will sell for. Move the resale on the telehandler from $46,000 to $36,000 and the ROI drops from 17.4 to 15.6 per cent without anything changing in the yard. There is a whole guide on getting resale values right.
- It says nothing about cash. A machine can show a healthy ROI on paper while the loan instalments and a slow-paying customer leave you short every month. Check the payback month and the cashflow alongside it, always.
Using ROI across the fleet
Once every machine has an honest annual ROI, the fleet review becomes short. Rank the units. The bottom fifth are the ones to reprice, move to a busier depot, or sell. The top fifth are the ones to buy more of, provided you are not turning enquiries away already at a rate you could raise. The middle is fine. Do it twice a year with last year’s actual utilisation and today’s resale values, and the fleet stops carrying passengers.
Common questions
What is a good ROI for rental equipment?
Most fleets set a target of 10 to 15 per cent a year on acquisition cost, and the calculator on this site uses 10 per cent as its default. Below about 8 per cent the machine is barely beating the cost of the money tied up in it. Above 20 per cent, check the resale assumption before you celebrate, because that is usually where the extra return is coming from.
How do you calculate ROI on a rental machine?
Take a full year of rental revenue for the machine, subtract everything it cost you to own and run it that year — depreciation, interest, maintenance, insurance, registration and its share of overhead — and divide the result by what you paid for the machine. Multiply by 100 for a percentage. Do it per year, not once over the whole life, because the answer changes as the machine ages.
Is ROI the same as payback?
No. ROI measures how much profit the machine earns each year relative to its cost. Payback measures how many months until the cash you put in has come back. A machine can have a good ROI and a long payback, or a fast payback and a poor lifetime ROI. You need both, and they answer different questions.
Should ROI be calculated on the purchase price or on the deposit?
On the purchase price, if you want to compare machines with each other and with what the money could earn elsewhere. Calculating on the deposit alone gives a much bigger number — it is really return on equity — and it flatters heavily financed machines. Use it only when you are specifically asking how hard your own cash is working.
Why does the resale value matter so much for ROI?
Because depreciation is usually the single largest cost in the calculation, and depreciation is just purchase price minus resale value spread over the years you keep the machine. Every dollar of optimism in the resale figure comes straight out of depreciation and straight into the ROI. A machine that only clears its target because of a generous resale assumption is a bet on the used-equipment market, not a rental business.
See the ROI on your own machine, year by year
Enter what it cost, what you charge and how busy it will be. The calculator returns the annual return against your target, the payback month, and a what-if grid showing where the return runs out.
Read next
- Will this machine pay for itself? Payback explainedThe month your cumulative cash turns positive, why it matters alongside ROI, and the worked telehandler that pays back in month 24 — or never, at fifteen points less utilisation.
- What your machine is worth in year three, and why it changes the rateBook depreciation is for tax. Market residuals set your rate and your ROI. Decline curves by machine family and what an eighteen-point error costs.
- Time utilisation vs financial utilisation, and why busy machines lose moneyTwo identical excavators, same yard, same year. One was on hire 54 days more and earned $1,905 less.