How to use the ROI calculator
The ROI tool measures one investment:
- Amount invested: what you put in at the start.
- Other costs: commissions, fees, repairs, legal costs or anything else spent on the investment. They are added to the cost, not subtracted from the return.
- Amount returned or gain. Enter what you got back in total (sale proceeds or current value, plus any income received), or switch to entering the gain before costs.
- Years held, if you want the annualized ROI. Fractions such as 2.5 are fine.
The Compare investments tool takes one row per investment, with the amount invested, the amount returned and the years held, and ranks them by annualized ROI.
The ROI formula
Net gain = Amount returned − Total cost
ROI = Net gain ÷ Total cost
Annualized ROI = (1 + ROI)1 ÷ years − 1The amount returned includes any income received along the way. The annualized ROI is the constant yearly rate that produces the same total return.
A worked example
You invest $20,000 and pay $500 in costs, for a total cost of $20,500.00. After 3 years you receive $27,500.
The net gain is $7,000.00 and the ROI is 34.15%: you got back 1.34× your total cost. Spread over 3 years, that is an annualized ROI of 10.29%.
Without the costs, the ROI would have been 37.50% instead of 34.15%. Fixed costs weigh most on small investments, so include every one of them.
Why ROI must be annualized to compare
A total ROI says nothing about how long it took. The same 34.15% looks very different depending on the holding period:
| Years held | Total ROI | Annualized ROI |
|---|---|---|
| 1 year | +34.15% | +34.15% |
| 3 years (example) | +34.15% | +10.29% |
| 6 years | +34.15% | +5.02% |
| 10 years | +34.15% | +2.98% |
The comparison tool shows how this changes a ranking. In its example, Investment A has the highest total ROI, 60.00%, but it took five years. Investment B returned less in total, yet grew money faster at 14.02% a year. When money can be reinvested once an investment ends, the yearly rate is the fairer basis for comparison.
Annualizing uses compounding, not simple division. Dividing 34.15% by 3 years gives 11.38% a year, which overstates the rate because each year’s growth builds on the previous year’s.
ROI versus IRR
ROI works cleanly when there is one amount in at the start and one amount out at the end. Most real investments are messier: a rental property pays rent every month, a savings plan adds money every year, a business makes several rounds of investment. ROI adds up all the money in and out regardless of when it moved, so a dollar received in year one counts the same as a dollar in year ten.
The internal rate of return handles this by valuing each cash flow at its own date. For a single investment and a single payoff, the IRR equals the annualized ROI. With several cash flows, use the IRR calculator, or its XIRR tool when the dates are irregular.
What this calculator does not include
- Taxes. The ROI is before tax unless you enter after-tax amounts. In the US, gains on assets held longer than a year are usually taxed at lower long-term capital gains rates.
- Inflation. The result is a nominal return. Our real return calculator removes inflation.
- Risk. Two investments with the same ROI can carry very different risks of loss.
- Opportunity cost. A positive ROI can still trail what the money would have earned elsewhere. The NPV calculator measures a return against a required rate.