Return on Investment (ROI) Calculator
Understanding Return on Investment (ROI)
Return on Investment (ROI) is a fundamental financial metric used to evaluate the efficiency or profitability of an investment. It measures the amount of return on an investment relative to its cost. Whether you are analyzing stock market performance, business expenditures, or real estate purchases, ROI provides a universal language for comparing different opportunities.
The ROI Formula
The basic calculation for ROI is straightforward:
ROI = [(Final Value of Investment – Initial Cost of Investment) / Initial Cost of Investment] × 100
This result is expressed as a percentage. A positive percentage indicates a profit, while a negative percentage indicates a loss on the capital deployed.
Suppose you invest $10,000 in a marketing campaign. After six months, the campaign has generated $15,000 in new revenue.
- Net Profit: $15,000 – $10,000 = $5,000
- ROI: ($5,000 / $10,000) × 100 = 50%
Why Annualized ROI Matters
The standard ROI calculation does not account for the length of time an investment is held. A 50% return is excellent if achieved in one year, but less impressive if it takes ten years. Annualized ROI solves this by showing the geometric mean of the return each year, allowing you to compare investments held over different time periods.
Limitations of ROI
While useful, ROI has limitations. It does not account for risk or volatility. An investment with a 20% ROI might be much riskier than one with a 10% ROI. Furthermore, it doesn't consider transaction costs, taxes, or maintenance fees unless they are manually added to the "Initial Cost" field.