Return on Investment ROI Calculator
Calculator Use
Return on investment (ROI) calculator finds ROI as the percentage change in value from the initial investment to the final value of the investment. Length of the investment determines the annualized ROI.
What is ROI
ROI, or return on investment, is a ratio between the net final value of an investment and the cost of the investment. Net final value includes accumulated interest and dividends and is reduced by investment expenses like trading commissions. ROI is typically stated as a percentage.
How to Calculate Return on Investment ROI
The formula for return on investment is:
Where:
- ROI = return on investment
- net fv = net final value: the final value of the investment including investment income and deducting investment costs
- iv = initial investment
ROI is a basic performance metric for any type of investment. It allows you to assess the profitability of an investment, and you can also compare investments based on their returns or ROIs. A positive ROI means that an investment was profitable and a negative ROI means the investment is worth less than its initial value.
ROI does not account for the period of time over which the investment was held. Time period is an important factor to consider when evaluating the efficiency of any investment because earnings, interest and dividends can accrue. If annualized ROI is positive it means the value of your initial investment has increased.
Say you had to choose whether to invest $1000 in a fund that would be valued at $1150 after one year, or $600 in a fund that would be valued at $800 after 3 years. Which would be the favorable investment?
How to Calculate Annualized ROI
You can compare investments of different lengths by finding the annualized ROI for each investment. Annualizing the ROI is recalculating the ROI percentage as an annual rate of return. The formula for annualized return on investment is:
Where:
- Annualized ROI = annualized return on investment
- net fv = net final value: the final value of the investment including investment income and deducting investment costs
- iv = initial investment
- n = the number of years an investment is held, in decimal form
Annualizing the ROI assumes that the investment has the same ROI each year, but investment income is accrued and increases the value of the investment over the period it is held.
If you take the example above and plug the numbers into the ROI calculator you'll see that an investment of $1000 with a final value of $1150 at the end of one year has a 15% ROI. But an investment of $600 with a final value of $800 after 3 years has an annualized ROI of 10.064%. Although you would make more money with less of an investment in the $600 scenario, the $1000 investment earning $150 at the end of one year is the more profitable option because the ROI of 15% is higher than the ROI of 10.064%.