How to Calculate ROI

Calculating ROI is straightforward when you have clear start and end values. This guide walks through the process, covers annualized ROI, and offers practical tips for accurate results.

Basic Steps

1. Determine initial investment: The amount you invested at the start. Include purchase price and any upfront fees or costs you want to factor in.
2. Determine final value: What you receive at the end—sale proceeds, redemption value, or current market value. Subtract selling costs if applicable.
3. Calculate net gain or loss: Final value minus initial investment.
4. Divide by initial investment: Net gain / Initial investment.
5. Convert to percentage: Multiply by 100.

Formula: ROI = [(Final Value − Initial Investment) / Initial Investment] × 100. For the full derivation, see ROI Formula.

Example: Stock Investment

You buy 100 shares at $50 per share ($5,000 total) plus a $10 commission. Two years later, you sell at $65 per share ($6,500) minus a $10 commission.

• Initial investment: $5,000 + $10 = $5,010
• Final value: $6,500 − $10 = $6,490
• Net gain: $6,490 − $5,010 = $1,480
• ROI: ($1,480 / $5,010) × 100 ≈ 29.54%

Your total ROI over two years is about 29.54%. To express this as an annual rate, use annualized ROI.

Calculating Annualized ROI

Annualized ROI converts a multi-year return into an equivalent compound annual growth rate. Formula:

Annualized ROI = [(Final Value / Initial Investment)^1/n − 1] × 100

where n is the number of years. For the example above: (6,490 / 5,010)^(1/2) − 1 ≈ 0.1386, or about 13.86% per year. This allows comparison with investments held for different periods. See annualized return in the glossary.

Example: Real Estate

You buy a property for $300,000 (including closing costs). You spend $25,000 on renovations. Five years later, you sell for $400,000 after selling costs.

• Total cost: $300,000 + $25,000 = $325,000
• Final value: $400,000
• Net gain: $400,000 − $325,000 = $75,000
• ROI: ($75,000 / $325,000) × 100 ≈ 23.08%
• Annualized ROI: (400,000 / 325,000)^(1/5) − 1 ≈ 0.0424, or about 4.24% per year

Note: This example ignores rental income. A full analysis would include rental cash flows and use IRR; see ROI vs IRR.

Fractional Periods

Investments are often held for partial years (e.g., 18 months = 1.5 years). Use the same formulas with n = 1.5. Annualized ROI: (Final/Initial)^(1/1.5) − 1.

What to Include in Costs

Be consistent. Common inclusions: purchase price, commissions, fees, closing costs, renovations or improvements. Exclusions can inflate ROI. If you omit costs for one investment, do the same for comparisons. For a strict definition of profit, see net profit.

Common Mistakes

• Comparing different time periods without annualizing: A 50% return over 1 year is not the same as 50% over 10 years.
• Ignoring fees: Commissions and taxes reduce actual returns.
• Using ROI for complex cash flows: Use IRR when there are multiple deposits or withdrawals.
• Dividing by zero: Initial investment must be positive.

For more on when ROI can mislead, see ROI Limitations.

Using the Calculator

Our ROI Calculator performs these calculations for you. Enter initial investment, final value, and holding period. For target-ROI mode, enter the desired annual ROI percentage to find the required final value. Results include ROI, annualized ROI, total profit, and a 5-year projection chart.