Use this ROI calculator to easily calculate the return on investment over time: overall and annualized ROI are shown.
- ROI Formula
- How to calculate ROI (Return on Investment)
- Calculating annualized return
- ROI - Practical Examples
Return on investment is a ratio that evaluates how efficient a certain investment is. It is the obligatory starting and finishing point for any ambitious investor as it presents the potential of a future deal and the end results of a finished one in simple numbers.
ROI is calculated by dividing the gain from an investment by the base amount of money. This measure is usually expressed in percentages, as it makes comparing different investment plans easier – you can assess which is going to benefit your account, and which will be a loss at a glance, especially with our ROI calculator.
Let’s break down the ROI formula:
ROI = (net profit / total investment) x 100.
The net profit equals the difference between the net benefit and the net cost related to making the investment. The total investment is the sum one has decided to put into a specific venture. In order to receive the result in a percentage, we multiply the ratio by 100. The above formula is used in our return on investment calculator.
ROI is a preferred metric due to its simplicity - it is truly easy to calculate and provides definite results to the situation and figures at hand. It is also extremely popular as a term, so if you mention it or want someone to do it for you, they will most probably know exactly what you are talking about.
This efficiency ratio can be applied to any and all situations regarding profitability measurement. It is largely used in finance, marketing, investing, business operations, etc.
How to calculate ROI (Return on Investment)
The return on investment calculator allows you to assess the worth of every dollar you invested. All you need to do is input the amount of your initial investment and the final return, and mark the time period across which the investment spans.
At the press of a button you will receive valuable information regarding your investment gain, your ROI and the annualized return – both in percentages.
You can use this tool to analyze your ongoing investments or compare prospects you are considering and decide which you should go for.
Low-performing and high-performing investments will be easily differentiated. Some may be of negative value, whereas others will be positive. In other cases, maybe all of the investments will be profitable, however – some more beneficial to you than others.
Having this information in mind, you can optimize your strategy, business plan or portfolio with our handy ROI calculator at your side.
Calculating annualized return
Despite its flexibility, there is a great limitation related to return on investment: It does not take into consideration time as a crucial factor. When comparing two ventures, one must make sure they are spread across the same time period in order to receive truthful numbers. Otherwise, it may seem that they both have an expected ROI of 35% for example, in the first case it being achieved in one year, whereas the second needs four years to be completed.
Evidently, a 35% ROI over a year is way better than over 4 years. So, in order to overcome this setback, you can calculate and analyze the annualized return on investment (supported by our calculator). The formula used in this case is:
Annualized ROI = [(ending value / beginning value) ^ (1 / number of years)] - 1,
where the number of years equals (ending date - starting date) / 365.
For example, imagine you buy stock in a tech company worth $1,000 on January 1, 2012. You then decide to sell it on January 1, 2015 for $3,200. Your annualized return will be as follows:
Annualized ROI = [(3,200 / 1,000) ^ (1/3)] - 1 = [(3.2 ^ (1/3)] – 1 = 1.47 - 1 = 0.47 = 47%.
In contrast, if you calculate the regular return on investment, the figures will be misleading:
Regular ROI = (3,200 - 1,000) / 1,000 = 2,200 / 1,000 = 2.2 = 220%.
Of course, the easiest way is to just plug the numbers into the ROI calculator above.
ROI - Practical Examples
Let’s now go through different scenarios where ROI is applicable. For instance, a young entrepreneur wants to launch a small catering business. He has calculated that the base investment needed is $30,000, and in his first year he will have a profit of $36,000. The entrepreneur still ponders whether to start the business or invest the $30,000 in a bank with an annual interest rate of 15%.
To calculate his ROI in the first case we do the following:
ROI = [(36,000 – 30,000) / 30,000] x 100 = (6,000 / 30,000) x 100 = 0.2 x 100 = 20%.
Evidently, the return on investment is greater than the interest rate he can receive from the bank, so the smart decision would be to follow through with his business aspirations.
In our next example we will look at a woman who takes out a loan to buy an old apartment. She borrows $120,000 and then spends another $15,000 on repairs and furnishing, so her overall costs are $135,000. In a few months she manages to sell the property for $180,000 and wants to know what her return on investment is. All she needs to do is:
ROI = [(180,000 – 135,000) / 135,000] x 100 = (45,000 / 135,000) x 100 = 0.33 x 100 = 33%. Feel free to verify the numbers by using our calculator above.
Wikipedia, "Return on investment" [online] Available at: https://en.wikipedia.org/wiki/Return_on_investment.
Cite this calculator & page
If you'd like to cite this online calculator resource and information as provided on the page, you can use the following citation:
Georgiev G.Z., "Return on Investment Calculator", [online] Available at: https://www.gigacalculator.com/calculators/roi-calculator.php URL [Accessed Date: 27 Sep, 2021].