Dr. Finch holds a Ph.D. in Financial Economics and has extensive experience in capital budgeting, fund performance analysis, and market risk assessment.
The **Return on Investment (ROI) Calculator** is the most common metric for gauging the efficiency of an investment. This four-variable calculator solves for any missing input: **Investment Gain ($G$)**, **Initial Cost ($C$)**, **ROI Ratio (%) ($R$)**, or the **Holding Period (Years) ($N$)**. **Input any three of the four core variables** to find the missing one. Note: When solving for N, the calculation assumes ROI is the Compound Annual Growth Rate (CAGR).
Return on Investment Calculator
Return on Investment Formulas
The core ROI formula is $R = G/C$. When calculating the Holding Period ($N$), we treat the final ROI as the total gain over the period, and annualize it using the CAGR formula structure.
Note: $N$ calculation uses the Compound Annual Growth Rate (CAGR) framework, where $R$ becomes the annual growth rate.
Formula Source: Investopedia: Return on Investment
Variables Explained
The calculation relies on these four interconnected investment variables:
- Investment Gain (G): The total profit or loss from the investment (Selling Price – Initial Cost + Income).
- Initial Cost (C): The original price or amount invested (or the total capital deployed).
- ROI Ratio (R): The resulting percentage return ($G/C \times 100$).
- Holding Period (N): The number of years the investment was held (used for annualized returns).
Related Calculators
Further explore investment profitability and efficiency tools:
- Compound Annual Growth Rate Calculator (CAGR)
- Net Present Value Calculator (NPV)
- Internal Rate of Return Calculator (IRR)
- Payout Ratio Calculator
What is Return on Investment (ROI)?
The **Return on Investment (ROI)** is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. It directly measures the amount of return on a particular investment, relative to the investment’s cost. It is often expressed as a percentage. The formula is simply Net Profit divided by the Cost of Investment, multiplied by 100.
ROI is the most common profitability ratio because of its simplicity and versatility. A positive ROI indicates that gains exceed costs, while a negative ROI means the investment lost money. While basic ROI gives a cumulative return over the holding period, it typically does not account for the **time value of money**, which is where metrics like IRR and NPV become necessary for capital budgeting decisions.
How to Calculate ROI (Example)
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Identify Components:
An initial investment ($\mathbf{C}$) was $\mathbf{\$10,000}$. The final value was $\mathbf{\$12,500}$. Therefore, the $\mathbf{Investment\ Gain\ (G)}$ is $\mathbf{\$2,500}$. The investment was held for $\mathbf{4\ years\ (N)}$.
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Apply the ROI Formula:
$$ R = \frac{G}{C} \times 100 = \frac{\$2,500}{\$10,000} \times 100 $$
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Determine the ROI:
The total ROI is $\mathbf{25.0\%}$.
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Calculate Annualized ROI (CAGR):
The annualized return is calculated as: $(\frac{\$12,500}{\$10,000})^{1/4} – 1 \approx \mathbf{5.74\%}$ per year. This shows the time effect.
Frequently Asked Questions (FAQ)
A: No. ROI is purely a measure of return efficiency. It does not factor in the volatility (risk) of the investment. A separate risk-adjusted return metric, like the Sharpe Ratio, is needed to compare returns across different risk levels.
A: In general usage, they are often used interchangeably. However, ROR sometimes specifically refers to the simple annual percentage return, whereas ROI is typically used for the total cumulative return over the life of the investment.
A: Expressing ROI as a percentage makes it easier to compare the returns of investments of vastly different sizes. A gain of \$1,000 on a \$10,000 investment (10%) is clearly less efficient than a gain of \$500 on a \$1,000 investment (50%).
A: Its main weakness is the omission of the time element. A 20% ROI achieved over 1 year is much better than a 20% ROI achieved over 10 years, but the basic formula doesn’t distinguish between the two.