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What Is ROI (Return on Investment)?
ROI measures how much profit you've made relative to your original investment. It's expressed as a percentage and is one of the most widely used metrics in finance, business, and investing.
ROI = (Net Profit / Investment Cost) × 100%
ROI = ((Final Value - Investment Cost) / Investment Cost) × 100%
For example, if you invested $10,000 and it grew to $15,000, your ROI is 50% — you made $5,000 profit on a $10,000 investment.
ROI vs Annualized ROI
Simple ROI tells you the total return, but it doesn't account for time. A 50% ROI in 1 year is very different from 50% over 10 years. Annualized ROI (also called Compound Annual Growth Rate or CAGR) solves this by showing what your average yearly return would be if the growth was steady.
Annualized ROI = ((Final Value / Investment Cost) ^ (1/Years) - 1) × 100%
ROI Examples by Investment Type
Stock Market
You buy $5,000 of stock and sell it 3 years later for $7,500. Simple ROI = 50%. Annualized ROI = 14.47%. This helps you compare against index funds that average ~10% per year.
Real Estate
You buy a rental property for $200,000. After 5 years, it's worth $280,000 and you collected $60,000 in rent (net of expenses). Total return = $140,000. ROI = 70%. Annualized ROI = 11.2%.
Business Investment
You invest $50,000 in a business. After 2 years, your share is worth $80,000. ROI = 60%. Annualized ROI = 26.5%.
Frequently Asked Questions
What is a good ROI?
A "good" ROI depends on the investment type. The S&P 500 has historically returned about 10% per year (before inflation). Real estate investors typically aim for 8-12% annually. A business investment might target 15-30% to compensate for higher risk. Generally, any ROI that consistently beats inflation (3% historically) and low-risk alternatives like bonds (4-6%) is considered decent.
Does ROI include fees and taxes?
Simple ROI typically doesn't include fees and taxes, which is one of its limitations. For a more accurate picture, subtract all transaction fees, management fees, and estimated taxes from your final value before calculating. Our calculator lets you enter the net final value to account for this.
What's the difference between ROI and IRR?
ROI measures total return as a simple percentage. IRR (Internal Rate of Return) accounts for the timing of cash flows — when money goes in and comes out. IRR is more accurate for investments with multiple cash flows over time (like rental properties or business investments), while ROI works well for simple buy-and-sell scenarios.
Can ROI be negative?
Yes. If your final value is less than your investment cost, your ROI will be negative. For example, if you invested $10,000 and ended up with $8,000, your ROI is -20%, meaning you lost 20% of your original investment.
How do I calculate ROI with additional contributions?
The basic ROI formula doesn't handle additional contributions well. For investments where you add money over time (like monthly DCA into stocks), you'd need to calculate the weighted average cost basis, or use a different metric like time-weighted return or money-weighted return (IRR). Our compound interest calculator is better suited for that scenario.
Is annualized ROI the same as CAGR?
Yes, annualized ROI and CAGR (Compound Annual Growth Rate) are essentially the same thing. Both measure the average annual return assuming steady compounding growth. They're calculated using the same formula: ((Ending Value / Beginning Value) ^ (1/Years)) - 1.