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How to Calculate Rate of Return (ROI) in Excel
Whether you are analyzing a stock portfolio, a real estate purchase, or a business capital expenditure, calculating the Rate of Return on Investment (ROI) is crucial for measuring profitability. This guide explains both the mathematical logic and the specific Excel formulas you need.
The Basic ROI Formula
The standard Return on Investment formula measures the percentage gain relative to the initial cost. It is calculated as:
ROI = ((Final Value – Initial Cost) / Initial Cost) * 100
If your investment generated dividends or additional income (like rent), the formula expands to:
ROI = ((Final Value + Income – Initial Cost) / Initial Cost) * 100
Excel Formula: Simple ROI
To calculate simple ROI in Excel, assume your data is organized as follows:
| Cell | Description | Value (Example) |
|---|---|---|
| A2 | Initial Investment | $10,000 |
| B2 | Ending Value | $12,500 |
The Excel Formula:
=(B2-A2)/A2
Note: Format the result cell as a Percentage (%) in Excel to see the correct value (e.g., 25%).
Excel Formula: Annualized Return (CAGR)
Simple ROI doesn't account for time. A 20% return over 1 year is great; a 20% return over 10 years is poor. To account for time, we calculate the Annualized Return (or CAGR).
Assume C2 contains the number of years held (e.g., 3).
Method 1: Manual Formula
=((B2/A2)^(1/C2))-1
Method 2: RRI Function
Excel has a built-in function specifically for this:
=RRI(C2, A2, B2)
Syntax: =RRI(number_of_periods, present_value, future_value)
Real-World Example Scenarios
1. Stock Market: You buy 100 shares at $50 ($5,000). You sell them later for $60 ($6,000) and received $200 in dividends.
- Total Gain: $6,000 + $200 – $5,000 = $1,200
- ROI: ($1,200 / $5,000) = 24%
2. Real Estate: You put $50,000 down on a house. The house appreciates, and your equity grows to $75,000 over 5 years. You also netted $10,000 in rental income.
- Total Gain: $75,000 (Equity) + $10,000 (Rent) – $50,000 (Initial) = $35,000
- ROI: $35,000 / $50,000 = 70%
- Annualized: ((85,000 / 50,000)^(1/5)) – 1 = 11.2% per year.