ROI Calculator
Total ROI and the annualized rate, side by side in the ROI calculator. A 50% return over ten years and over one year are not the same thing, and only the annualized rate says so.
ROI
- ROI $13,000.00 of gain on $25,000.00 invested.
- 52%
- Annualized (CAGR) The constant yearly rate that turns $25,000.00 into $38,000.00 over 4 years. This is the figure to compare against other investments. Total ROI says nothing about how long it took.
- 11.04%
- Why not just divide by the years Dividing total ROI by the holding period ignores compounding and overstates the rate. The gap here is 1.96%, and it widens with both the return and the term.
- that would say 13%
- Total gain
- $13,000.00
- Final value 1.520x the amount invested.
- $38,000.00
- Real return after inflation The nominal 11.04% less 3% inflation. Note this is the compounded form, (1+r)/(1+i)-1, not a subtraction; the difference matters at high rates.
- 7.8%
- Doubling time at this rate The rule of 72 estimates 6.5 years.
- 6.6 years
| Held for | Total ROI | Annualized | Real after inflation |
|---|---|---|---|
| 1 year | 52% | 52% | 47.57% |
| 2 years | 52% | 23.29% | 19.7% |
| 3 years | 52% | 14.98% | 11.63% |
| 5 years | 52% | 8.73% | 5.57% |
| 10 years | 52% | 4.28% | 1.24% |
| 20 years | 52% | 2.12% | -0.86% |
- ROI treats every dollar as arriving at once. Where money goes in and out over time (a rental property, a business), IRR is the right measure, because it accounts for when each cash flow happened.
- The real return uses (1 + nominal) / (1 + inflation) - 1 rather than a subtraction. At low rates the two are nearly identical; at 20% inflation they differ materially.
How the ROI Calculator works
Return on investment is gain over cost. Put in $25,000, end with $38,000, and the gain of $13,000 on $25,000 is a 52% ROI.
That number is nearly useless on its own, for one reason: it says nothing about time. A 52% return in one year is excellent. The same 52% over twenty years is about 2.1% a year, which loses to inflation. Total ROI cannot distinguish them, and comparing two investments on it is comparing nothing.
The fix is to annualize, and the right way is the compound annual growth rate: the constant yearly rate that would turn the starting value into the ending one. CAGR = (final / initial)^(1/years) - 1. For 52% over four years that is 11.0% a year.
The wrong way, which appears constantly, is dividing total ROI by the number of years: 52% / 4 = 13%. That ignores compounding and always overstates the rate, because it assumes each year's return is calculated on the original amount rather than on the grown balance. The error grows with both the return and the holding period, and it is always in the flattering direction, which is presumably why it persists in marketing material.
Three things belong in the calculation and are routinely left out.
Income received along the way. A rental property's rent, a stock's dividends, a bond's coupons. Capital gain alone understates the return of anything that pays out, sometimes by most of it. A large share of long-run equity returns has historically come from dividends rather than price appreciation.
Fees and costs. Commissions, management fees, transaction costs and the spread. Expressing them as a reduction in annual rate rather than a dollar figure is what makes them comparable: a $500 fee on a $25,000 four-year investment costs about 0.5% a year, which can be set against the fee of any alternative.
And inflation. A nominal 11% during 3% inflation is a real 7.8%, computed as (1.11 / 1.03) - 1 rather than by subtracting. At low rates the subtraction is a good approximation; at high ones it is not.
ROI has one structural limitation worth understanding, which is why finance uses other measures alongside it. It treats the investment as a single amount in at the start and a single amount out at the end. Real investments rarely work that way: a business takes staged capital, a rental property generates monthly cash flow, a portfolio receives ongoing contributions. For those, the right measure is INTERNAL RATE OF RETURN, which accounts for when each cash flow occurred. A dollar returned in year one is worth more than a dollar returned in year ten, and ROI cannot see the difference.
For business rather than investment use, the same arithmetic answers a different question: ROI on a marketing campaign, a piece of equipment, a hire. The hard part there is attributing the gain honestly. Revenue that would have arrived anyway is not return on the campaign that preceded it, and the gap between correlation and incrementality is where most reported marketing ROI lives.
ROI Calculator FAQ
How do I calculate ROI?
Gain divided by cost. Invest $25,000, end with $38,000, and the $13,000 gain on $25,000 is 52%. Include any income received along the way and subtract fees. Both are part of the return, and both are commonly left out.
What is the difference between ROI and CAGR?
ROI is the total return with no reference to time; CAGR is the constant annual rate that produces it. A 52% ROI is excellent over one year and poor over twenty, and only CAGR distinguishes them. CAGR = (final / initial)^(1/years) - 1.
Why not just divide ROI by the number of years?
Because it ignores compounding and always overstates the rate. 52% over four years divided by four is 13%, while the true compound rate is 11%. The error grows with both the return and the holding period, and always in the flattering direction.
What is a good ROI?
It depends entirely on the annualized figure and the risk. The long-run US stock market has returned roughly 10% a year nominal, so an annualized return below that for comparable risk is underperforming a passive alternative. Compare CAGR against an index, not total ROI against a feeling.