Formula for Calculating Rate of Return on Investment

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Required for Annualized Return calculation
Net Profit / Loss: $0.00
Total ROI (%): 0.00%
Annualized ROI (CAGR): 0.00%
Investment Multiple: 0.00x

Understanding the Rate of Return Formula

The Rate of Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.

The Core ROI Formula

To calculate the basic Rate of Return manually, you can use the following formula:

ROI = [ (Final Value – Initial Investment + Income) / Initial Investment ] × 100

Where:

  • Final Value: The current market value of the investment or the amount it was sold for.
  • Initial Investment: The original cost to acquire the asset.
  • Income: Any cash flow generated by the asset during the holding period (e.g., dividends from stocks, rent from real estate).

Example Calculation

Imagine you purchased a stock for $1,000. Three years later, you sold the stock for $1,200. During those three years, you also received $50 in dividends.

  1. Total Gain: ($1,200 – $1,000) + $50 = $250
  2. ROI Calculation: ($250 / $1,000) × 100 = 25%

Annualized Return (CAGR)

While standard ROI tells you the total growth, it does not account for time. A 25% return over 1 year is excellent, but a 25% return over 10 years is poor. To solve this, we calculate the Annualized ROI, often referred to as the Compound Annual Growth Rate (CAGR):

Annualized ROI = [ ( (Final Value + Income) / Initial Investment ) ^ (1 / Years) ] – 1

This metric smoothes out the returns so you can compare investments held for different time periods on an equal footing.

Why is ROI Important?

Calculating the rate of return is essential for portfolio management. It allows investors to separate high-performing assets from underperforming ones. Whether you are investing in stocks, real estate, or a small business, knowing your exact ROI helps in making informed financial decisions regarding where to allocate future capital.

function calculateROI() { // 1. Get DOM elements var initialInput = document.getElementById('initial_investment'); var finalInput = document.getElementById('final_value'); var incomeInput = document.getElementById('investment_income'); var yearsInput = document.getElementById('investment_years'); var resultBox = document.getElementById('roi_result_display'); // 2. Parse values var initial = parseFloat(initialInput.value); var finalVal = parseFloat(finalInput.value); var income = parseFloat(incomeInput.value); var years = parseFloat(yearsInput.value); // 3. Validation if (isNaN(initial) || initial === 0) { alert("Please enter a valid initial investment amount greater than 0."); return; } if (isNaN(finalVal)) { alert("Please enter the final or current value of the investment."); return; } if (isNaN(income)) { income = 0; } if (isNaN(years) || years 0) { // Formula: ((End / Start)^(1/n)) – 1 var endValueTotal = finalVal + income; // Avoid complex number results if total return is negative and years is even root (basic js math protection) // However, generally for finance we just process the ratio: if ((endValueTotal / initial) > 0) { annualizedRoi = (Math.pow((endValueTotal / initial), (1 / years)) – 1) * 100; annualizedText = annualizedRoi.toFixed(2) + "%"; } else { // If you lost 100% or more, CAGR calc is tricky/undefined in standard growth terms annualizedText = "-100% or Loss"; } } // 5. Update UI resultBox.style.display = "block"; // Net Profit var profitElement = document.getElementById('result_net_profit'); profitElement.innerText = "$" + totalReturn.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2}); profitElement.style.color = totalReturn >= 0 ? "#2c7a7b" : "#e53e3e"; // Total ROI var roiElement = document.getElementById('result_total_roi'); roiElement.innerText = roiPercent.toFixed(2) + "%"; roiElement.style.color = roiPercent >= 0 ? "#2c7a7b" : "#e53e3e"; // Annualized ROI document.getElementById('result_annualized_roi').innerText = annualizedText; // Multiple document.getElementById('result_multiple').innerText = multiple.toFixed(2) + "x"; }

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