What ROI tells you
Return on investment compares the gain with the cost, which makes very different investments comparable. A 2,000 profit on 10,000 and a 200 profit on 1,000 are the same 20% return.
It says nothing about risk or time. A 20% return in one year is very different from a 20% return over ten, which is why this calculator shows the annualised rate next to the ROI.
Comparing investments fairly
Use the annual return when options were held for different periods. Use the multiple of your money to see how many times the original sum has grown. Always compare after fees and taxes.
For recurring deposits, such as monthly contributions, ROI on the total can mislead because money went in at different times. Use the compound interest calculator to model that case.
Limits to keep in mind
Past returns do not predict future ones. ROI also ignores income that was paid out along the way, such as dividends or rent, unless you include it in the final value.
A worked example
Suppose you buy shares for 5,000 and sell them four years later for 6,200. The profit is 1,200, so the ROI is 24%. Spread over four years, the annualised return is about 5.5% a year, since 1.24 raised to the power of one quarter is roughly 1.055.
Questions people ask
How do you calculate ROI?
ROI = (final value − amount invested) ÷ amount invested × 100. If you invest 1,000 and it becomes 1,500, the profit is 500 and the ROI is 50%.
What is annualised return?
It is the steady yearly growth rate that would turn your starting amount into the final value over the time held: (final ÷ invested)^(1 ÷ years) − 1. A 50% gain over three years is about 14.5% a year, not 16.7%, because of compounding.
Why is annual return lower than ROI divided by years?
Dividing by years ignores compounding. Gains build on earlier gains, so the true yearly rate is a little lower than the simple average. Annual return is the better figure for comparing investments held for different lengths of time.
Does ROI include fees and taxes?
Only if you include them. Subtract fees, commissions and tax from the final value, or add them to the amount invested, to get a return that reflects what you actually keep.
Can ROI be negative?
Yes. If the final value is below the amount invested, ROI is negative. A total loss is −100%, and an annual return cannot be calculated for it.