Return on investment (ROI) is the simplest measure of how well money worked for you: the profit divided by the cost, expressed as a percentage. ROI = (final − cost) / cost × 100. It is dimensionless, so the same formula compares a stock trade, a rental property, a piece of equipment or an ad campaign. Its weakness is that it ignores time — so for anything held longer than a year, convert it to an annualized return to see the true yearly rate.
Reviewed: June 20, 2026 · Author: Naveen P N, Founder — AI Calculator · Verified against: standard ROI and CAGR definitions. Not financial advice.
The ROI equations
ROI rescales the profit against what you risked, so 500 earned on 1,000 (50%) clearly beats 500 earned on 10,000 (5%). The annualized formula takes the total growth multiple (final ÷ initial), takes its year-th root to find the constant yearly factor, and subtracts one — this is the compound annual growth rate (CAGR). For holding periods under one year it actually over-states the annual rate, so treat sub-year annualized figures with caution.
Worked example — a three-year investment
Scenario: You invest 1,000 and sell three years later for 1,500.
The total ROI is 50% and the net profit is 500. Spread over three years that is an annualized return of about 14.5% — the yearly rate that, compounded three times, turns 1,000 into 1,500. Notice how different the story sounds: 50% looks great until you see it took three years, at which point ≈14.5%/yr is a fairer benchmark against, say, an index fund or a savings rate. Always annualize before comparing investments held for different lengths of time.
Frequently Asked Questions
ROI = (final − cost) / cost × 100. 1,000 → 1,500 = 50%, with 500 net profit.
((final/initial)^(1/years) − 1) × 100 — the yearly compound rate. 50% over 3 yr ≈ 14.5%/yr.
Yes — if final < cost. 1,000 → 800 is −20%. 0% means you broke even.
Everything: price, fees, commissions, taxes. Use the net amount received. Omitting fees inflates ROI.
No — it ignores scale, risk and time. Pair it with annualized ROI and the size of the bet.