📈 ROI Calculator
Return on investment as a plain percentage and as an annualised figure. The annualised number is the one that matters, because a 40% return over six years and a 40% return over eight months are not the same result.
Return on investment, and why the plain figure usually misleads
Return on investment is the simplest performance measure there is: what you gained, divided by what you put in. Its simplicity is also its weakness, because it says nothing about how long the money was tied up. A 54% return is excellent over one year and mediocre over ten, and the plain ROI figure reports both identically.
ROI = (Final value − Initial cost) / Initial cost × 100
Annualised ROI = [ (Final / Initial)1/n − 1 ] × 100
n is the holding period in years. The second formula is the one to quote when comparing investments, because it converts every return to the same unit: percent per year.
The same return over different periods
| Holding period | Total ROI | Annualised | Verdict |
|---|---|---|---|
| 1 year | 54.00% | 54.00% | Outstanding |
| 3 years | 54.00% | 15.48% | Very good |
| 5 years | 54.00% | 9.02% | Solid |
| 10 years | 54.00% | 4.41% | Below a broad index fund |
| 20 years | 54.00% | 2.18% | Worse than inflation |
Every row describes exactly the same gain in dollars. Only the last column changes, and it changes from a result worth celebrating to one that lost purchasing power. Any ROI quoted without a time period is incomplete, and when someone omits it the period is usually long.
Annualising is not dividing
Dividing a total return by the number of years gives a number that is always too high, because it ignores compounding. The 54% above divided by five is 10.8%, against the correct 9.02%. The gap widens with both the size of the return and the length of the period: a 300% return over ten years is 14.87% a year, not 30%.
The reason is that growth compounds on growth. An investment earning 9.02% a year does not earn 9.02% of the original stake each year; it earns 9.02% of a balance that keeps rising. The compound interest calculator shows the same mechanism from the other direction.
Annualised ROI is the same quantity as CAGR, the compound annual growth rate. If a fund factsheet quotes CAGR and your spreadsheet quotes annualised ROI, they are comparable; a simple average of yearly returns is not comparable to either, and is always the flattering one.
What belongs in the initial cost
ROI is only as honest as its denominator. Everything required to acquire and hold the investment belongs in the cost: purchase price, commissions, fees, taxes on the way in, and any capital spent during ownership. For a rental property that means the deposit plus stamp duty plus legal fees plus the refurbishment, not just the deposit. Leaving costs out is the most common way an ROI figure flatters itself.
On the other side, the final value should be net of exit costs and any tax due on the gain. A 20% gross return on shares held in a taxable account is not a 20% return to you. Comparing a tax-sheltered return with a taxable one is comparing different things.
ROI ignores risk, and risk is the other half
Two investments returning 12% a year are not equivalent if one is a diversified index fund and the other is a single early-stage company where the realistic outcomes are zero or a hundredfold. ROI is a measure of what happened, not of what could have happened, and it is calculated only on the investments that survived to be measured. Looking at the returns of the funds still trading today systematically overstates what was available, because the failures stopped reporting.
A useful habit is to write down the realistic downside alongside the expected return before committing. If the worst case is losing the entire stake, the return needs to be high enough to compensate for the cases where that happens, not merely higher than the alternative.
A worked example
A small business spends $18,000 on new equipment. It raises output worth $7,200 a year, and after four years the equipment is sold for $3,000. Total return is $28,800 of extra output plus $3,000 of salvage, against the $18,000 cost: a gain of $13,800, or 76.67% ROI. Annualised over four years that is 15.22% a year. Against a cost of borrowing at 7%, the project clears its hurdle with room to spare — and the margin calculator checks whether the extra output is actually profitable at the prices being charged.
Most people arrive here on the way to something else, so it is worth knowing the investment calculator, which handles the next part, and the margin calculator, which covers the case just beyond.
Frequently Asked Questions (FAQs)
What counts as a good ROI?
It depends entirely on the period and the risk. As a reference point, broad stock markets have returned roughly 7% to 10% a year over long periods before inflation, so an annualised return below that for a risky single investment is a poor trade. A 54% total return is excellent in one year and poor over ten.
How do I annualise a return?
Divide the final value by the initial value, raise it to the power of one over the number of years, subtract one, and multiply by a hundred. Do not divide the total return by the number of years — that ignores compounding and always overstates the result.
Is ROI the same as CAGR?
Annualised ROI and CAGR are the same calculation. Plain ROI is different: it is the total return over the whole period with no reference to time, so it cannot be compared across investments held for different lengths of time.
Can ROI be negative?
Yes, whenever the final value is below the total cost. A negative ROI of 100% means the entire investment was lost. ROI cannot go below minus 100% unless you had further liabilities beyond the amount invested, as can happen with leverage.
Should I include fees and taxes?
Yes, on both sides. Acquisition costs, ongoing fees and capital spent during ownership all belong in the cost; exit costs and tax on the gain come off the final value. Excluding them is the most common reason a quoted ROI is higher than the return anyone actually received.
Does ROI account for risk?
No, and this is its main limitation. It describes one outcome that happened, with no reference to the range of outcomes that were possible. Two investments with identical ROI can have completely different risk, which is why professional comparisons pair return with a measure of volatility.
How does ROI differ from ROE or ROAS?
They share the structure but change the denominator. Return on equity divides profit by shareholders' equity; return on ad spend divides revenue by advertising cost. Each answers a narrower question, so check which denominator is being used before comparing two figures.