Return on investment, or ROI, answers a basic question: for every dollar you put in, how much did you get back? You can use it for stocks, a rental property, a side business, or a marketing campaign. The formula is simple, but ROI is easy to misread if you don't also look at how long the money was invested.
The ROI formula
ROI = (final value − amount invested) ÷ amount invested × 100
Say you invest $10,000 and it grows to $14,500:
- Net profit: $14,500 − $10,000 = $4,500
- ROI: $4,500 ÷ $10,000 × 100 = 45%
Another way to say the same thing is the investment multiple. $14,500 ÷ $10,000 = 1.45x, so every dollar turned into $1.45.
If the final value is lower than what you invested, ROI is negative. A $10,000 investment that falls to $8,000 has an ROI of −20%.
The catch: time
A 45% return sounds better than a 100% return only if you ignore time. Compare these two investments:
| Investment A | Investment B | |
|---|---|---|
| Invested | $10,000 | $5,000 |
| Final value | $14,500 | $10,000 |
| Holding period | 3 years | 10 years |
| Total ROI | 45% | 100% |
| Annualized ROI | ≈ 13.2% / yr | ≈ 7.2% / yr |
Investment B doubled its money, but it took ten years. Investment A grew faster every year. Annualized ROI puts both on the same yearly scale, and it's the number to compare.
How annualized ROI works
Annualized ROI (also called CAGR, compound annual growth rate) finds the steady yearly rate that would turn your starting amount into your final amount:
Annualized ROI = (final value ÷ amount invested)^(1 ÷ years) − 1
For Investment A: 1.45^(1/3) − 1 ≈ 0.132, or 13.2% per year. The exponent spreads the gain across the years and accounts for compounding, so you can't just divide 45% by 3.
Getting an honest number
ROI is only as good as the numbers you put in. To keep it accurate:
- Include costs in the amount invested: purchase fees, commissions, closing costs, repairs.
- Include income in the final value: dividends, rent, or interest you received along the way.
- Consider inflation: a 3% yearly return during 3% inflation leaves you with about the same buying power you started with.
Try it
The ROI Calculator does the math for you. Enter what you invested and what it's worth now, and add the holding period to see annualized ROI. To see how a return grows over time with regular compounding, use the Interest Calculator. To find out whether your gains beat rising prices, check them against the Inflation Calculator.