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.
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.