Understanding ROI: How to Measure Investment Success
Return on Investment (ROI) is a critical financial metric used to evaluate the efficiency of an investment or compare the efficiencies of several different investments. Whether you are investing in the stock market, real estate, or a marketing campaign, calculating ROI helps you understand exactly how much profit or loss you have realized relative to the cost of the investment.
The ROI Formula
The basic formula for ROI is straightforward:
ROI = [(Current Value of Investment – Cost of Investment) / Cost of Investment] × 100
Why Calculate Annualized ROI?
The standard ROI doesn't account for time. A 50% return is great, but it's much better if achieved in 1 year rather than 10 years. Annualized ROI (also known as Compound Annual Growth Rate or CAGR) provides the geometric mean return per year, allowing you to compare investments held for different durations on equal footing.
Practical Example
Metric
Example Value
Initial Investment
$10,000
Final Value after 3 Years
$15,000
Net Profit
$5,000
Total ROI
50%
Annualized ROI
14.47%
What is a "Good" ROI?
A "good" ROI depends entirely on the risk profile and the asset class. For instance, the S&P 500 historically returns about 10% annually. A venture capital investment might target 30-50% ROI due to the high risk of failure, while a savings account might offer only 1-4%. Always consider the "opportunity cost" — the return you could have earned elsewhere with the same capital.
function calculateROI() {
var initial = parseFloat(document.getElementById('initialCost').value);
var final = parseFloat(document.getElementById('finalValue').value);
var years = parseFloat(document.getElementById('investmentPeriod').value);
var resultCard = document.getElementById('roiResultCard');
var totalGainEl = document.getElementById('totalGain');
var roiPercEl = document.getElementById('roiPercentage');
var annContainer = document.getElementById('annualizedContainer');
var annPercEl = document.getElementById('annualizedPercentage');
if (isNaN(initial) || isNaN(final) || initial === 0) {
alert("Please enter valid numbers. Initial investment cannot be zero.");
return;
}
// Basic ROI Calculation
var gain = final – initial;
var roi = (gain / initial) * 100;
// Display Results
resultCard.style.display = 'block';
totalGainEl.innerText = (gain >= 0 ? '$' : '-$') + Math.abs(gain).toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
roiPercEl.innerText = roi.toFixed(2) + '%';
if (roi > 0) {
roiPercEl.style.color = "#27ae60";
} else if (roi 0) {
// Formula: ((Final / Initial)^(1/n) – 1) * 100
var annualized = (Math.pow((final / initial), (1 / years)) – 1) * 100;
annContainer.style.display = 'block';
annPercEl.innerText = annualized.toFixed(2) + '%';
} else {
annContainer.style.display = 'none';
}
// Scroll to result for mobile users
resultCard.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}