About the ROI Calculator
ROI is the most universal performance metric in finance: what you made, divided by what it cost. Its simplicity is both a strength and a trap — a 50% ROI over 5 years is entirely different from a 50% ROI over 6 months, which is where the annualized figure earns its keep.
This tool gives the raw ROI, the profit in dollars, and — when you supply a holding period — the annualized (CAGR) return that allows apples-to-apples comparison between investments of different lengths.
The formula behind it
Simple ROI, with annualization as a compound rate:
ROI = (Final value − Cost) / Cost × 100 • Annualized = ((1+ROI)^(1/years) − 1) × 100Cost is your all-in basis (including fees and taxes when known); value is what you sold or the current market worth. Annualization assumes profits were reinvested at that rate each year — an honest middle assumption for periods of more than a year.
Worked example
Defaults — bought for $5,000, now worth $7,500, held 2 years:
- Profit = $2,500 → ROI = +50%.
- Annualized = (1.50)^(1/2) − 1 = 22.47%.
Takeaway: A “50% return” figures much more accurately as 22.5%/yr. Leave the years at 0 and the tool shows only raw ROI — but compare raw ROI only when the holding periods match.
What moves the result
- All-in cost basis — fees, commissions, taxes and renovations belong in the denominator.
- Holding period — the annualized figure changes the answer dramatically.
- Sources of return — capital gain, dividends and rent are all ROI, but they arrive with different risk and tax handling.
- Repeat-ability — an ROI from one lucky trade says little about a repeatable rate.
Practical tips
- Include every cost in the basis — most home-comparison ROI errors come from forgotten fees, taxes or opinionated valuations.
- Use annualized ROI when comparing anything across different timeframes.
- Question extremely high annualized numbers: they are usually either extremely short-term trades, luck, leverage, or a small slice of a big deal (thin ROI capital).
- Worry about risk, not only ROI — a 15%/yr steady instrument often beats a 40% spike followed by a 30% drawdown on a portfolio basis.
- For reinvesting income ideas like dividends, use the dividends and DCA calculators — ROI on single deals behaves differently than income streams.
Frequently asked questions
What is a good ROI?
There is no universal number: a 7%/.yr stable diversified portfolio is actually difficult to beat; a 20% one-off flip may carry risks you can’t repeat. Judge ROI against a comparable-risk benchmark.
How is this different from IRR or CAGR?
CAGR (as the tool annualizes) assumes a single in and a single out. IRR handles cash flows during the period (rents, dividends, extra contributions). CAGR is easier; IRR suits flows.
Should I include tax paid on gains?
If comparing after-tax performance, yes. Otherwise a “40% return” on high-taxed gains may underperform a 25% one for you specifically.