Calculate Return on Investment (ROI), Investment Gain, and Annualized ROI instantly. Free online tool for investors, business owners, and marketers.
Return on Investment (ROI) is a financial metric that measures the profitability of an investment relative to its cost. It is expressed as a percentage and helps investors, business owners, and marketers evaluate the efficiency of an investment. The higher the ROI percentage, the more profitable the investment.
ROI is one of the most widely used financial metrics because it is simple to calculate and easy to understand. Whether you are evaluating a stock purchase, a real estate property, a marketing campaign, or a new business project, ROI provides a clear picture of how much value you generated compared to what you spent.
Professional investors use ROI to compare different investment opportunities on a level playing field. Business owners rely on ROI to decide which projects deserve funding. Marketers calculate ROI to measure the effectiveness of advertising campaigns. Real estate investors use ROI to determine whether a rental property will generate sufficient returns.
The standard formula for calculating Return on Investment is:
ROI = ((Gain − Cost) / Cost) × 100
Where: Gain = Amount Returned • Cost = Amount Invested
In other words:
ROI = ((Amount Returned − Amount Invested) / Amount Invested) × 100
Because ROI alone does not account for the time period of an investment, the annualized ROI (also known as Compound Annual Growth Rate or CAGR) provides a more accurate comparison between investments of different durations:
Annualized ROI = ((Final Value / Initial Investment)1/Years − 1) × 100
This formula normalizes the return over a standard one-year period, allowing you to compare a 6-month investment with a 5-year investment on equal terms.
An investor buys 100 shares of a company at $50 per share, for a total investment of $5,000. After 2 years, the shares are sold at $75 per share, resulting in a total return of $7,500.
Calculation:
Investment Gain = $7,500 − $5,000 = $2,500
ROI = ($2,500 / $5,000) × 100 = 50%
Annualized ROI = ((7500/5000)1/2 − 1) × 100 = 22.47%
Result: The investor earned $2,500 profit, a 50% total ROI, or 22.47% per year compounded.
An investor purchases a rental property for $200,000. After 5 years, the property is sold for $280,000. The investor also earned $60,000 in rental income over the 5 years, making the total return $340,000.
Calculation:
Investment Gain = $340,000 − $200,000 = $140,000
ROI = ($140,000 / $200,000) × 100 = 70%
Annualized ROI = ((340000/200000)1/5 − 1) × 100 = 11.20%
Result: The property generated $140,000 total profit, a 70% ROI, or 11.20% annualized.
A company invests $50,000 in a new marketing campaign. Over 18 months (1.5 years), the campaign generates $95,000 in additional revenue.
Calculation:
Investment Gain = $95,000 − $50,000 = $45,000
ROI = ($45,000 / $50,000) × 100 = 90%
Annualized ROI = ((95000/50000)1/1.5 − 1) × 100 = 56.13%
Result: The campaign earned $45,000 profit, a 90% ROI, or 56.13% annualized. This high annualized ROI reflects the short 18-month duration.
Comparing Investments: ROI allows you to compare the profitability of different investments regardless of their size. A $1,000 investment that returns $1,500 (50% ROI) can be directly compared to a $100,000 investment that returns $140,000 (40% ROI).
Measuring Profitability: ROI quantifies how efficiently your capital is being used. It answers the fundamental question: "For every dollar I invested, how many dollars did I earn in return?"
Budget Allocation: Businesses use ROI to decide where to allocate limited resources. Projects, departments, or campaigns with higher projected ROI receive priority funding.
Business Decision-Making: From equipment purchases to hiring decisions, ROI provides a data-driven framework for evaluating whether an expense is justified by its expected returns.
While ROI is a powerful metric, it has important limitations that every investor should understand:
| Metric | What It Measures | Key Difference from ROI |
|---|---|---|
| ROI | Total percentage return relative to cost | Standard baseline metric; does not account for time |
| Rate of Return (ROR) | Gain or loss over a period | Often used interchangeably with ROI; may include income |
| CAGR | Annualized growth rate assuming compounding | Same as annualized ROI; accounts for time and compounding |
| IRR | Discount rate making NPV zero | Accounts for timing of cash flows; more complex |
| Payback Period | Time needed to recover initial investment | Does not measure profitability; only liquidity risk |
Each metric serves a different purpose. Use ROI for a quick profitability check, annualized ROI / CAGR for time-adjusted comparisons, IRR for projects with irregular cash flows, and payback period for understanding how quickly you recover your investment.