Return on Investment (ROI) Calculator

Understanding ROI (Return on Investment)

Return on Investment, or ROI, is a fundamental concept in finance that helps investors evaluate the efficiency of an investment. It measures the amount of return on an investment relative to the investment’s cost. This metric is widely used because of its simplicity and versatility, applicable across different types of assets such as real estate, stocks, startups, and even educational investments.

To calculate ROI, you subtract the cost of the investment from the total return and divide it by the original investment cost. This gives you a percentage that represents the profitability. A positive ROI means your investment made a profit, while a negative ROI indicates a loss.

However, ROI alone does not account for the time it took to generate that return. This is where the concept of annualized ROI, or Compound Annual Growth Rate (CAGR), becomes important. The annualized ROI gives a clearer picture of how an investment performed on a yearly basis, which is particularly helpful when comparing multiple investments held over different periods.

Formulas Used

ROI: ROI = (Amount Returned - Amount Invested) / Amount Invested

Annualized ROI: Annualized ROI = ((Amount Returned / Amount Invested) ^ (1 / years)) - 1

For example, if you invested $1,000 and received $2,000 five years later, your ROI would be 100%. But the annualized ROI, reflecting yearly growth, would be about 14.87%. This annualized metric helps you make apples-to-apples comparisons with other investments.