ROI Calculator
Calculate your return on investment (ROI) and annualized returns. Compare different investment opportunities.
ROI Formula:
ROI = (Final Value - Initial Investment) / Initial Investment × 100
Total ROI
+50.0%
Over 3.0 years
Total Gain/Loss
+$5,000
Annualized ROI
+14.47%
Annualized ROI (CAGR) shows the compounded annual growth rate, useful for comparing investments of different lengths.
Understanding ROI
ROI = (Gain / Cost) × 100
Simple ROI calculates the total return as a percentage of the initial investment, regardless of time.
Best for: Quick comparisons, single-period investments
CAGR = (FV/PV)^(1/n) - 1
Compound Annual Growth Rate shows what the investment would return each year if it grew at a steady rate.
Best for: Comparing investments of different durations
Frequently Asked Questions
ROI Formula, Annualized ROI, and CAGR Explained
Return on Investment (ROI) measures profitability as a percentage of the initial cost: ROI = (Gain - Cost) / Cost x 100. An investment purchased for $10,000 and sold for $15,000 yields an ROI of 50%. The formula is straightforward but does not account for the time period — a 50% return over 1 year is very different from 50% over 10 years.
Annualized ROI (CAGR) solves this by calculating the equivalent annual compound growth rate: CAGR = (Final Value / Initial Value)^(1/Years) - 1. That same 50% total return over 5 years translates to an annualized ROI of 8.45%, not 10% (which would be the simple average). Over 3 years, the same 50% total equals 14.47% annualized. CAGR provides the most accurate comparison between investments held for different durations.
| Total ROI | Time Period | Annualized ROI (CAGR) |
|---|---|---|
| 50% | 1 year | 50.00% |
| 50% | 3 years | 14.47% |
| 50% | 5 years | 8.45% |
| 50% | 10 years | 4.14% |
| 100% | 7 years | 10.41% |
| 200% | 10 years | 11.61% |
ROI vs IRR vs NPV: Choosing the Right Metric
Simple ROI works best for single-investment, lump-sum scenarios with a clear start and end. It ignores the time value of money and the timing of cash flows. Internal Rate of Return (IRR) accounts for the timing of multiple cash flows and calculates the discount rate at which the net present value equals zero. Net Present Value (NPV) converts all future cash flows to present-day dollars using a chosen discount rate.
For comparing two investments of similar size and duration, ROI is sufficient. For projects with uneven cash flows over time (e.g., rental property with monthly income, a business investment with growing revenue), IRR provides a more accurate picture. NPV is preferred when you need a dollar-value answer to "how much value does this project create?" Sophisticated investors often calculate all three: ROI for a quick overview, IRR for return comparison, and NPV for absolute value creation.
A key limitation of ROI: it does not account for risk. A 15% ROI on a Treasury bond is far superior to 15% ROI on a speculative startup, because the risk profile is entirely different. Risk-adjusted return metrics like the Sharpe Ratio (excess return per unit of volatility) address this. The S&P 500 historical Sharpe Ratio is approximately 0.4-0.5, meaning roughly 4-5% excess return per 10% of volatility.
Investment ROI Benchmarks: Historical Returns by Asset Class
Benchmarking ROI against relevant indices helps determine whether an investment outperformed or underperformed the market. The S&P 500 has delivered approximately 10% average annual return (including dividends) since 1928, or about 7% after inflation. Any investment claiming to outperform must beat this readily accessible, low-cost benchmark.
| Asset Class | Avg Annual Return (1928-2024) | Risk Level |
|---|---|---|
| U.S. Large-Cap Stocks (S&P 500) | ~10% | Moderate-High |
| U.S. Small-Cap Stocks | ~12% | High |
| International Developed Stocks | ~8% | Moderate-High |
| U.S. Bonds (10-Year Treasury) | ~5% | Low-Moderate |
| Real Estate (REITs) | ~9-11% | Moderate |
| Gold | ~7% | Moderate |
| Cash/Money Market | ~3.5% | Very Low |
For business investments, target ROI varies by industry. Retail businesses typically aim for 15-25% ROI. Real estate investments target 8-12% cash-on-cash return plus appreciation. Marketing campaigns should deliver at least 5:1 return (400% ROI). SaaS companies often measure ROI through LTV:CAC ratio, targeting 3:1 or higher — meaning $3 in customer lifetime value for every $1 spent acquiring them.