What ROI tells you
Return on investment (ROI) shows your profit or loss as a percentage of what an investment cost you. It works for almost anything you pay for now and hope to get more back from later: shares, a fund, a rental property, a machine for your business or a marketing project. Because it is a percentage, you can compare a $500 investment with a $50,000 one.
In this calculator, cost is the amount invested plus any extra costs, and final value is the amount returned plus any extra income. Net profit is the gain in money, the difference between the two.
ROI vs annualized ROI
Plain ROI ignores time, and time changes everything. Say investment A turns $10,000 into $15,000 in five years, a 50% ROI. Investment B turns $10,000 into $13,000 in two years, a 30% ROI. A looks better, but B earned its gain much faster.
Annualized ROI answers the fair question: what steady yearly return would get you from the start to the end? For A that is 8.45% a year, for B 14.02% a year. B wins clearly, because you could reinvest its money for the remaining three years. Use the compare mode above to check this for your own options; it ranks them by annualized ROI, not by plain ROI.
Annualized ROI compounds, so it is not the same as dividing the total ROI by the number of years. 50% over five years is not 10% a year: at 10% compounded you would end with about 61% after five years.
Examples
| Investment | Cost | Final value | Years | ROI | Annualized | Multiple |
|---|---|---|---|---|---|---|
| Index fund | $10,000 | $14,500 | 3 | 45.00% | 13.19% | 1.45x |
| Savings bond | $5,000 | $5,600 | 2 | 12.00% | 5.83% | 1.12x |
| Equipment for a side business | $2,000 | $3,500 | 1.5 | 75.00% | 45.22% | 1.75x |
| Collectible sold at a loss | $1,200 | $1,000 | 4 | −16.67% | −4.46% | 0.83x |
| Rental property | $20,000 | $31,000 | 7 | 55.00% | 6.46% | 1.55x |
The side business equipment has the highest ROI per year, but over a short period. The rental property has a higher total ROI than the index fund, yet a much lower yearly return, before even counting the work it takes.
What ROI does not show
- Risk. Two investments with the same ROI can carry very different chances of losing money. A government bond and a single small company stock are not equal just because their numbers match.
- Timing of cash flows. ROI only knows the start and the end. If you added money every month or took payouts along the way, use an internal rate of return (IRR or XIRR in a spreadsheet) instead.
- Inflation and taxes. A 5% yearly return with 3% inflation leaves about 2% of real growth. Enter taxes you paid as extra costs to see the return you actually keep.
- Your time. Hours spent managing a property or a side business are a cost too, even if they never appear in the numbers.
How to use the ROI calculator
- 1Enter the amount you invested and the amount you got back or the current value, and pick your currency.
- 2Add extra costs and extra income if there were any, then set the length in years and months or with a start and an end date.
- 3Read the ROI, net profit, annualized ROI and multiple. Switch to compare mode to rank two or three options by their yearly return.
Frequently asked questions
What is a good ROI?
There is no single number. Compare the annualized ROI with what the same money could have earned elsewhere with similar risk, such as a savings account, a bond or a broad index fund. An investment that beats a safe option only by a little may not be worth the extra risk and work.
Can ROI be negative?
Yes. If you get back less than you put in, net profit and ROI are negative. Without borrowed money the worst case is −100%, which means everything is lost. The annualized figure is negative too and shows the average yearly loss.
Should I include fees, taxes and dividends?
Yes, if you want the real return. Put purchase fees, account fees, repairs or taxes you paid into extra costs, and dividends, interest or rent you received into extra income. Leaving them out makes most investments look better than they were.
Why is the annualized ROI so high for a few months?
Annualizing assumes the same pace for a full year and compounds it. A 10% gain in three months becomes about 46.41% a year, which you would only reach if you could repeat that trade four times in a row. Treat annualized figures for periods under a year with care.
What is the difference between ROI and IRR?
ROI and annualized ROI look only at the start and the end. The internal rate of return (IRR, or XIRR in a spreadsheet) also accounts for money you add or take out along the way and when that happens. For a single deposit and a single payout, annualized ROI and IRR give the same result.