ROI Calculator
ROI Formula
Basic ROI
ROI = (Gain - Cost) / Cost × 100
Annualized ROI
AROI = ((1 + ROI)^(1/n) - 1) × 100
Related Calculators
Understanding Return on Investment
What is ROI?
Return on Investment (ROI) is a financial metric used to evaluate the efficiency of an investment. It measures the gain or loss generated relative to the amount invested, expressed as a percentage.
Basic ROI Formula
Why Annualized ROI Matters
A 50% return sounds great, but not if it took 10 years to achieve. Annualized ROI converts any return to an equivalent annual rate, allowing fair comparison between investments with different time periods.
Example 1
Example 2
Despite Example 1 having a higher total ROI (50% vs 30%), Example 2 has a better annualized return (14.02% vs 8.45%), making it the more efficient investment.
Calculating ROI Step by Step
Example: Stock Investment
Limitations of ROI
- • Ignores time: Basic ROI doesn't account for how long the investment took
- • Ignores risk: A 10% return from bonds isn't the same as 10% from stocks
- • Ignores cash flows: Doesn't account for dividends, distributions, or additional investments
- • Ignores inflation: A 5% return with 3% inflation is really only 2% in purchasing power
ROI Benchmarks
| Investment Type | Typical Annual ROI | Risk Level |
|---|---|---|
| Savings Account | 0.5% - 5% | Very Low |
| Bonds | 4% - 6% | Low |
| S&P 500 (Historical) | 10% - 12% | Medium |
| Real Estate | 8% - 12% | Medium |
| Individual Stocks | Varies Widely | High |
Real vs. Nominal ROI
Nominal ROI is the return before adjusting for inflation. Real ROI accounts for inflation and shows the actual increase in purchasing power.
Real ROI Formula
Example: 10% nominal return with 3% inflation = 6.8% real return
Investment Decision Tips
- • Always compare investments using annualized ROI
- • Consider risk alongside returns
- • Account for taxes and fees in your calculations
- • Remember past performance doesn't guarantee future results
- • Diversify to balance risk and return
Frequently Asked Questions
How do I calculate ROI?
ROI = (Final Value - Initial Investment) / Initial Investment x 100%. If you invested $10,000 and it grew to $15,000, your ROI is ($15,000 - $10,000) / $10,000 x 100% = 50%. This shows your total return as a percentage of what you invested.
Why is annualized ROI important?
Annualized ROI lets you compare investments with different time periods. A 50% return over 5 years (8.4% annualized) is less impressive than 30% over 2 years (14% annualized). Use the formula: Annualized ROI = (1 + ROI)^(1/years) - 1. Always compare investments using annualized returns.
What is a good ROI?
It depends on the investment type and risk. S&P 500 historically returns 10% annually. Savings accounts offer 3-5%. Real estate targets 8-12%. Riskier investments should offer higher potential returns. Compare ROI against alternatives with similar risk levels, not just the highest number.
What are the limitations of ROI?
ROI doesn't account for time (use annualized ROI), risk, cash flow timing, or opportunity cost. It also ignores taxes and fees. A simple 10% ROI from a savings account (low risk) isn't comparable to 10% from penny stocks (high risk). Use ROI alongside other metrics for complete analysis.