ROI formula
ROI = (Final value − Cost) ÷ Cost × 100
Annualized ROI = ((Final value ÷ Cost)1/years − 1) × 100
Annualized ROI = ((Final value ÷ Cost)1/years − 1) × 100
Example: You invest $10,000 and three years later your position is worth $14,500. Your net profit is $4,500, so total ROI is 45%. Annualized, that is (1.45)1/3 − 1 = 13.19% per year.
Using ROI correctly
- Compare like with like. Always compare annualized figures when holding periods differ.
- Account for risk. A higher ROI with a high chance of loss may be worse than a steady, lower return.
- Consider taxes and inflation. The return you keep after tax, and after inflation, is what builds wealth.
- Marketing ROI should use profit (revenue minus cost of goods), not revenue, as the return.
How to use the calculator
- Enter the amount invested — including purchase fees and commissions.
- Enter the amount returned or the current value — after selling costs, plus any dividends, interest or income received.
- Enter how long the investment was held to see the annualized return.
Total vs. annualized ROI
| Total ROI | Years | Annualized ROI |
|---|---|---|
| 45% | 3 | 13.19% |
| 45% | 5 | 7.71% |
| 100% | 5 | 14.87% |
| 100% | 10 | 7.18% |
| 200% | 10 | 11.61% |
| 20% | 1 | 20.00% |
Total ROI tells you how much you made; annualized ROI tells you how fast. A 45% gain over 3 years (13.2% a year) is much better than 45% over 5 years (7.7% a year). Always annualize before comparing investments held for different periods.
What to include
- All costs: purchase price, transaction fees, commissions, taxes paid on purchase, maintenance and improvements.
- All income: dividends, interest, rent and any cash received while you held the investment.
- Taxes: for an after-tax ROI, subtract the capital gains tax due on sale.
ROI for business projects
Businesses use ROI to compare projects: a $20,000 marketing campaign that generates $50,000 of additional gross profit has an ROI of ($50,000 − $20,000) ÷ $20,000 = 150%. Be careful to use profit, not revenue, and to count only the results the project actually caused. For advertising specifically, see the ROAS calculator.
Limitations of ROI
- Timing of cash flows: ROI treats all money as if it came in at the end. If you added money over time or received income along the way, an internal rate of return (IRR) is more accurate.
- Risk: two investments with the same ROI can have very different chances of loss.
- Inflation: a 20% return over 5 years with 3% annual inflation is only about a 3.5% real gain in total.
- Opportunity cost: compare with what the same money would have earned elsewhere, such as a broad index fund or a savings account.
Frequently asked questions
What is a good ROI?
It depends on risk and time. Broad U.S. stock indexes have historically returned roughly 10% a year before inflation over long periods, so many investors use that as a benchmark. A safe savings account might return 4–5%, while riskier ventures should offer more.
Why is annualized ROI important?
Total ROI ignores time. A 50% return over 2 years (about 22.5% a year) is far better than 50% over 10 years (about 4.1% a year). Annualized ROI lets you compare investments held for different periods.
What costs should I include?
Include everything you paid to make and hold the investment: purchase price, commissions, fees, taxes paid, and for property, closing costs and renovations. Include dividends, rent or other income received in the amount returned.
Is ROI the same as CAGR?
Annualized ROI calculated from a start and end value is the same as CAGR. Plain (total) ROI is not annualized. See the CAGR calculator for growth rates between any two values.
What is a good ROI?
It depends on risk. Broad U.S. stock indexes have returned roughly 10% a year on average over long periods (with large swings), high-yield savings far less. A riskier investment should offer a higher expected ROI.
Can ROI be negative?
Yes. If you get back less than you invested, ROI is negative. $10,000 that becomes $8,000 is a −20% ROI.