How ROI is calculated
Return on investment compares what you gained with what you put in:
ROI = (final value − amount invested) ÷ amount invested
If you invest $1,000 and get back $1,500, your ROI is 50%. Include every cost in the amount invested (purchase price, commissions, fees, improvements) and every benefit in the final value (sale proceeds, dividends or rent received), so the result reflects the real outcome.
Why annualized ROI matters
A 50% return sounds great, but not if it took 20 years. Plain ROI ignores time, so it cannot compare a two-year investment with a ten-year one. Annualized ROI, also called the compound annual growth rate (CAGR), answers: "what steady yearly return would have produced the same result?"
annualized ROI = (final value ÷ amount invested)1/years − 1
$1,000 growing to $1,500 in 3 years is 14.47% a year. The same gain over 10 years is only 4.14% a year, which may barely beat inflation.
Examples
- Stocks: bought for $10,000, now worth $14,500 including reinvested dividends after 3 years: 45% total, about 13.2% a year.
- Home improvement: a $20,000 kitchen remodel that adds $14,000 to the sale price has an ROI of −30%. Many renovations do not pay for themselves financially.
- Marketing: $2,000 of ads that generate $3,000 of gross profit return 50%.
- Side business: compare the profit with the money and the time you put in.
What ROI does not tell you
ROI does not measure risk. A 12% return from a volatile investment is not the same as 12% from a stable one. It also ignores taxes, which can take a meaningful share of the gain, and inflation. For investments with several deposits and withdrawals at different times, such as a 401(k) with monthly contributions, a simple ROI overstates or understates the result; use a money-weighted return (IRR) instead, or see how regular deposits grow with the compound interest calculator.
Frequently asked questions
What is a good ROI?
It depends on the risk and the time. Broad US stock market returns have historically averaged high single digits per year over long periods; safer investments return less. Compare annualized ROI, not total ROI.
How do I calculate annualized ROI?
Divide the final value by the amount invested, raise the result to the power of 1 divided by the number of years, and subtract 1. $1,000 to $1,500 in 3 years is 14.47% a year.
Can ROI be negative?
Yes. If the final value is less than what you invested, ROI is negative and shows the percentage you lost.
Is ROI the same as profit?
No. Profit is the dollar gain; ROI expresses that gain as a percentage of what you invested, so you can compare investments of different sizes.