ROI Calculator
Calculate Return on Investment (ROI), annualized returns (CAGR), payback period, and more for any investment.
What Is ROI (Return on Investment) and Why It Matters
Return on Investment (ROI) is one of the most fundamental and widely used metrics in finance and business. In simple terms, it measures the profitability of an investment by comparing the gain or loss to its initial cost. A positive ROI means the investment generated a profit, while a negative ROI indicates a loss. It matters because it provides a standardized way to compare the efficiency of different investments, helping you decide where to allocate your capital for the best possible returns.
How to Calculate Simple ROI and When to Use It
Simple ROI is straightforward to calculate and is best used for evaluating investments where the holding period is not a critical factor or for quick, back-of-the-napkin assessments. The formula is: ROI = [(Final Value - Initial Cost) / Initial Cost] * 100%. For example, if you buy a stock for $1,000 and sell it for $1,200, your net profit is $200. Your ROI would be ($200 / $1,000) * 100% = 20%. While easy to understand, its main limitation is that it doesn't account for time, meaning a 20% ROI over one month is treated the same as a 20% ROI over ten years.
Annualized Returns & CAGR — Comparing Investments Over Time
To overcome the time limitation of simple ROI, we use annualized metrics like the Compound Annual Growth Rate (CAGR). CAGR represents the constant rate of return required for an investment to grow from its starting value to its ending value over a specific period. It effectively smooths out market volatility. The formula is: CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1. CAGR is the gold standard for comparing investments with different time horizons, as it puts them on an equal, year-over-year footing.
Payback Period, NPV, and IRR — Tools for Deeper Analysis
For more complex projects, especially in corporate finance, more advanced tools are needed:
- Payback Period: This is the length of time required to recover the cost of an initial investment. It's a simple measure of risk—the shorter the payback, the less risky the project.
- Net Present Value (NPV): NPV accounts for the time value of money, which states that a dollar today is worth more than a dollar tomorrow. It calculates the present value of all future cash flows (both inflows and outflows) discounted at a specific rate. A positive NPV indicates a worthwhile investment.
- Internal Rate of Return (IRR): IRR is a discount rate that makes the NPV of all cash flows from a particular project equal to zero. In other words, it’s the expected compound annual rate of return an investment will generate. If the IRR is higher than the minimum required rate of return, the project is generally considered a good investment.
Practical Examples & Use Cases
ROI and its related metrics are versatile and can be applied across various fields. In business, a company might calculate the ROI of a new marketing campaign. In real estate, an investor calculates the ROI on a rental property by comparing rental income and appreciation to the property's cost and expenses. Stock market investors use CAGR to compare the long-term performance of different stocks or funds. Each use case might require a slightly different approach, but the core principle of measuring efficiency remains the same.
Frequently Asked Questions
The answers to common questions about ROI are provided as structured data (JSON-LD) in the head of this document, which helps search engines understand and display this information effectively.
Disclaimer: This calculator is provided for informational and educational purposes only. The results are estimates based on the data you provide and should not be considered financial, legal, or investment advice. Always consult with a qualified professional before making any financial decisions.
