How to Calculate Return on Investment (ROI Formula)

Return on Investment (ROI) is the universal yardstick of profitability. Knowing your ROI answers the most fundamental question for stock market investors, real estate moguls, and business owners: “Is this worth my money?”

However, a simple ROI percentage can be misleading. It doesn’t account for time (how long the money was tied up) or inflation (the eroding value of money).

In this guide, we’ll go beyond the basics. You’ll learn how to calculate Annualized ROI to compare investments fairly and how to calculate Real ROI to account for inflation. You’ll also learn how to use our Free ROI Calculator to model complex scenarios.

The Basic ROI Formula

The standard formula for ROI is deceptively simple:

$ROI = \left( \frac{\text{Net Profit}}{\text{Cost of Investment}} \right) \times 100$

Where:

• Net Profit = Final Value - Initial Cost

Example: You buy a vintage comic book for $1,000 and sell it for $1,500.

• Net Profit = $1,500 - $1,000 = $500
• ROI = ($500 / $1,000) * 100 = 50%

The Time Trap: Why Basic ROI Fails

A 50% return sounds fantastic. But what if it took you 20 years to sell that comic book?

• 50% over 1 year is amazing.
• 50% over 20 years is terrible, about 2% per year, worse than a savings account.

To compare investments fairly, you need Annualized ROI (also known as Compound Annual Growth Rate, or CAGR).

The Annualized ROI Formula (CAGR)

This formula tells you the effective yearly rate of return, assuming gains are reinvested.

$Annualized \ ROI = \left[ \left( \frac{\text{Final Value}}{\text{Initial Value}} \right)^{\frac{1}{n}} \right] - 1$

Where n = number of years.

The Comic Book Example (20 Years):

• Final / Initial = $1,500 / $1,000 = 1.5
• Exponent = 1 / 20 = 0.05
• 1.5 ^ 0.05 = 1.0205
• 1.0205 - 1 = 0.0205 = 2.05%

Now we see the truth. That “50% gain” was effectively just a 2% annual return.

The Inflation Factor: Real vs. Nominal ROI

If your investment grew by 3% this year, but inflation was 4%, you actually lost purchasing power.

• Nominal ROI: The number on your bank statement.
• Real ROI: The growth in actual purchasing power.

Approximation Formula: $Real \ ROI \approx Nominal \ ROI - Inflation \ Rate$

Precise Formula: $Real \ ROI = \left( \frac{1 + Nominal \ ROI}{1 + Inflation \ Rate} \right) - 1$

Using our ROI Calculator, you can simply enter an estimated inflation rate (e.g., 3%) to instantly see your Real ROI.

How to Use the ROI Calculator

We built the ROI Calculator to handle these complex formulas for you.

1. Enter Amounts: Input your “Amount Invested” and “Amount Returned”.
2. Set Duration: Choose between a simple “Years” duration or specific “Start/End Dates” for precision.
3. Inflation Adjustment: (Optional) Add an inflation rate to see your Real ROI.
4. Compare: Use the “Add to Comparison” button to line up multiple investment options (e.g., “Stock Portfolio” vs. “Rental Property”) side-by-side on the chart.

ROI by Investment Type

Different asset classes produce vastly different returns. Knowing the historical averages helps you set realistic expectations and benchmark your own performance.

Stocks

The S&P 500 has delivered an average annual return of roughly 10% before inflation over the past century. Adjusted for inflation, the real return drops to about 7% per year. Individual stocks vary enormously. Blue-chip dividend stocks may return 8-12% annually, while growth stocks can swing from -50% to +200% in a single year.

Real Estate

Residential real estate appreciation averages 3-5% annually in the US, but total ROI includes rental income. A rental property generating $12,000 in annual rent on a $200,000 investment earns 6% from cash flow alone. Add 3% appreciation and your total ROI reaches 9%. Subtract property taxes, insurance, maintenance, and vacancy costs to find your true net ROI.

Bonds

US Treasury bonds return 2-5% depending on the term. Corporate bonds pay higher yields (4-7%) because they carry more risk. Bond ROI is straightforward to calculate because the return is fixed at purchase, but selling before maturity introduces price fluctuation.

Small Business

Small business ROI varies wildly by industry. A successful restaurant might generate 15-25% annual ROI, while a failed venture produces -100% (total loss). The Small Business Administration reports that roughly 20% of new businesses fail within the first year and 50% within five years. Factor in the opportunity cost of your time when calculating small business ROI.

Common ROI Mistakes to Avoid

1. Ignoring Costs: Transaction fees, taxes, and maintenance costs reduce your net profit. Always subtract these from your “Final Value”.
2. Confusing Cash Flow with ROI: A rental property might have positive cash flow but negative ROI if the property value drops significantly.
3. Forgetting Risk: ROI measures return, not risk. A 20% return on a volatile crypto coin isn’t necessarily “better” than a 7% return on a diversified index fund. It just pays a premium for the risk.
4. Ignoring Time Value: A 50% return over one year is far superior to a 50% return over ten years. Always calculate Annualized ROI for fair comparisons.
5. Cherry-Picking Dates: Starting your measurement from a market low and ending at a peak inflates the ROI. Use consistent time periods when comparing investments.

Practical ROI Calculation Examples

Marketing Campaign ROI

You spend $5,000 on a Google Ads campaign that generates $18,000 in revenue.

• Net Profit = $18,000 - $5,000 = $13,000
• ROI = ($13,000 / $5,000) x 100 = 260%

This number looks impressive, but remember to subtract the cost of the product itself and any staff time spent managing the campaign. If the products cost $8,000, your real net profit is $5,000 and your ROI drops to 100%.

Home Renovation ROI

You spend $25,000 remodeling a kitchen. Your home value increases by $20,000.

• Net Profit = $20,000 - $25,000 = -$5,000
• ROI = (-$5,000 / $25,000) x 100 = -20%

Not every renovation pays for itself. Kitchen and bathroom remodels typically recover 50-80% of their cost at resale. Only renovations that increase the home value by more than the cost produce positive ROI.

Education ROI

You spend $40,000 on a certification that increases your annual salary by $10,000.

• Payback Period = $40,000 / $10,000 = 4 years
• 10-Year ROI = (($100,000 - $40,000) / $40,000) x 100 = 150%

Education ROI improves dramatically over time because the salary increase compounds throughout your career.

Ready to crunch the numbers? Try our Free ROI Calculator now.

Frequently Asked Questions

What is a good ROI percentage?

A “good” ROI depends on the investment type and your risk tolerance. For stocks, the long-term average is about 10% per year (7% after inflation). For real estate, 8-12% total return (rent plus appreciation) is solid. For business investments, anything above 15-20% is generally considered strong. Compare your ROI to the risk-free rate (US Treasury yield, currently around 4-5%) as a baseline. Any investment should beat the risk-free rate to justify the additional risk.

How do I calculate ROI on rental property?

Add your annual rental income to any property appreciation, then subtract all expenses: mortgage interest, property taxes, insurance, maintenance, vacancy costs, and property management fees. Divide the net profit by your total cash invested (down payment plus closing costs plus renovations). For example, if you invested $60,000 cash and earned $6,000 net profit in a year, your cash-on-cash ROI is 10%. Include appreciation for total ROI.

What is the difference between ROI and CAGR?

Basic ROI gives you a total return percentage without accounting for time. CAGR (Compound Annual Growth Rate) converts that total return into an equivalent yearly rate. A 100% ROI over 10 years sounds good, but the CAGR is only 7.2% per year. Always use CAGR when comparing investments held for different time periods. A 50% ROI in 2 years (CAGR 22.5%) is far better than 80% ROI in 10 years (CAGR 6.1%).

Should I use nominal or real ROI?

Use real ROI (adjusted for inflation) when evaluating whether your purchasing power actually grew. Nominal ROI is useful for tax calculations and comparing to stated benchmark returns. For long-term planning (retirement, college savings), real ROI gives you a more honest picture. At 3% inflation, a nominal 8% return becomes roughly 5% in real terms. Over 30 years, that difference is enormous.