How to Calculate ROI on Investments: With Examples and Calculator

Return on Investment (ROI) is the most straightforward measure of investment performance:

ROI = ((Net Gain) / Cost of Investment) × 100

ROI = ((Final Value − Initial Cost) / Initial Cost) × 100

Example: You buy shares for $10,000 and sell for $15,000.

ROI = (($15,000 − $10,000) / $10,000) × 100 = 50%

ROI is powerful because it's simple, universal, and works for any investment type. However, it has a key limitation: it doesn't account for time. A 50% ROI over 1 year is spectacular; over 10 years, it's mediocre. That's where CAGR comes in.

Stock investment example:

Buy $20,000 in stocks, receive $2,000 in dividends, sell for $28,000.

Total return = $28,000 + $2,000 − $20,000 = $10,000

ROI = ($10,000 / $20,000) × 100 = 50%

Real estate example:

Buy property for $200,000 with $15,000 in closing costs. Collect $60,000 in rent over 5 years, spend $20,000 on maintenance, sell for $260,000.

Net gain = $260,000 + $60,000 − $20,000 − $215,000 = $85,000

ROI = ($85,000 / $215,000) × 100 = 39.5%

Business example:

Invest $50,000 in equipment that generates $15,000/year in additional revenue for 5 years.

Net gain = ($15,000 × 5) − $50,000 = $25,000

ROI = ($25,000 / $50,000) × 100 = 50%

ROI tells you the total percentage gain. CAGR tells you the annualized growth rate:

CAGR = (Final Value / Initial Value)^(1/years) − 1

Example: $10,000 grows to $20,000 over 5 years.

• ROI = 100% (total doubling)
• CAGR = (20,000/10,000)^(1/5) − 1 = 14.87% per year

Why CAGR matters: Compare Investment A (80% ROI over 3 years = 21.7% CAGR) vs Investment B (120% ROI over 8 years = 10.4% CAGR). ROI alone makes B look better, but A actually grew faster annually.

Use ROI for quick assessment; use CAGR for comparing investments with different holding periods.

Watch out for these ROI pitfalls:

1. Ignoring costs: Transaction fees, management fees, taxes, and maintenance all reduce your actual return. A 50% gross ROI might be 35% net after costs.

1. Forgetting time: A 20% ROI over 10 years (1.84% CAGR) is terrible. Always consider the holding period.

1. Ignoring inflation: A 30% ROI over 10 years with 3% annual inflation means your real ROI is only about 4% total.

1. Cherry-picking dates: Starting your measurement at a market bottom and ending at a peak inflates ROI. Use consistent time periods.

1. Ignoring opportunity cost: Your $10,000 earning 20% ROI over 5 years sounds good—unless a simple index fund would have returned 60% in the same period.

To get accurate results from our ROI calculator:

1. Initial cost: Include purchase price plus all transaction costs (commissions, closing costs, setup fees).

1. Final value: Include sale proceeds plus any income received (dividends, rent, interest) minus any ongoing costs.

1. Compare alternatives: Run the calculator for each option you're considering. The one with the highest annualized return (CAGR) is generally best.

1. Stress test: Run scenarios with different final values to understand your upside and downside.

1. Use our ROI + CAGR calculator: It automatically computes both metrics, giving you both the total and annualized perspective in one view.