Return on Investment (ROI) Calculator

Return on investment, or ROI, expresses profit as a share of what was spent to earn it. It is one of the most widely used yardsticks in business and personal finance because it needs only two numbers and works for almost anything with a cost and a payoff: a stock position, a rental house, a marketing campaign, new equipment, or a professional certification.

A simple example: you spend $8,000 restoring a used boat and sell it for $11,000. The gain is $3,000, and the ROI is $3,000 ÷ $8,000 = 37.5%. The same formula can be rearranged to find the sale price needed for a target ROI. To earn 50% on that $8,000, you would need to sell for $12,000.

ROI is related to, but not the same as, rate of return. A rate of return is usually stated per year, while plain ROI covers whatever span the investment lasted. A 37.5% ROI earned over three months and the same 37.5% earned over ten years describe very different results, which is why this calculator also reports an annualized figure.

Formula

ROI = (Gain from investment − Cost of investment) ÷ Cost of investment

Gain from investment

everything the investment returned: sale proceeds plus income

Cost of investment

everything you put in

Annualized ROI = (Amount returned ÷ Amount invested)^(1 ÷ years) − 1. With dates, years = days ÷ 365.25.

Difficulty in Usage

Because ROI is so simple, it is easy to misuse. The first trap is time. Basic ROI ignores how long the money was tied up, so it flatters slow investments and can make quick, modest gains look unimpressive. Comparing a 40% return over eight years with a 15% return over one year without annualizing leads to the wrong choice.

The second trap is cost. What counts as the cost of an investment is a judgment call. For a rental property, you might include the purchase price, closing costs, repairs, insurance, property taxes and the value of your own time, or only the cash down payment. Different choices produce very different ROIs, so two people can quote ROIs for the same deal that are far apart. When you compare ROIs, make sure they were computed the same way.

Third, ROI says nothing about risk. A speculative venture and a Treasury bond can show the same ROI after the fact, but they carried very different chances of loss. It also ignores the timing of cash flows in the middle of the investment, such as dividends, rent or extra contributions. For investments with several deposits and withdrawals, metrics like the internal rate of return, or the money-weighted average return, describe performance more faithfully.

Finally, ROI is often quoted before taxes, fees and inflation. A 7% nominal gain in a year of 3% inflation and a 15% tax rate leaves a much smaller real, after-tax return.

Annualized ROI

Annualized ROI converts a total return into the steady yearly rate that would produce it, which puts investments of different lengths on the same footing. Doubling your money (100% ROI) over 4.159 years works out to about 18.14% a year, because 1.1814 compounded for 4.159 years gives 2.

Consider two choices. Investment A turns $10,000 into $14,000 over five years, a 40% ROI. Investment B turns $10,000 into $11,500 in one year, a 15% ROI. Annualized, A earns about 6.96% a year and B earns 15%, so B was the stronger performer even though its total ROI is lower.

Frequently asked questions

Sources

• Investor.gov – Introduction to Investing
• U.S. Small Business Administration – Plan your business