Return on Investment Calculator 2021CASAPLORERTrusted and Transparent
Return on investment, or ROI, is the amount of money that you make as a percentage of your initial investment. ROI is used as a quick way to see how efficient an investment is as it provides the return based on how much money the investment cost you. A higher ROI means that the investment provided a higher return.
Return on Investment Formula
How to Calculate ROI
To calculate ROI, you would first find out how much your investment earned. To do this, you would subtract the ending value of your investment from the amount of your initial investment. To get ROI, you would then divide your investment gain by your initial investment amount. This will return a number which can be multiplied by 100 to turn it into a percentage form.
If the result of your ROI calculation is a positive number, then your investment made a return. If your ROI is negative, then your investment incurred a loss.
Why use ROI?
ROI is used instead of just looking at the investment’s return on its own so that the investment could be looked at based on how efficient the investment was. If all you were told was that an investment made a return of $100, you would not be able to tell if this was a good investment or not.
Perhaps to make the return of $100 you only had to invest $1, which would have a very high ROI, or perhaps it would have required an investment of $1,000, which would have made it a poor investment choice. Rather than just looking at pure investment returns, knowing the ROI of an investment allows you to make a more informed decision of where to put your money.
Flaws of ROI
- Time of investments (holding period)
- Timing of returns
- Costs involved in the investment
What basic ROI does not take into account is time. Looking at ROI on its own would not give you much info to go on when comparing different investments. If you were told that an investment would have a ROI of 10% after 1 year, it might be a good investment choice. If there was an investment with a ROI of 10% after 100 years, then there might be other investment options that you should consider instead. While both of these investment options had the same ROI, the length of time of the investment matters.
Besides time, what ROI also misses is the timing of returns. ROI assumes that an investment’s return is steady and stays the same for the entire investment period. For example, if an investment had a ROI of 10% after 10 years, then that means that the investment consistently provided a return of 1% per year for 10 years. This misses the potential for fluctuations in returns for an investment within that 10 year period.
To account for the timing of returns, the internal rate of return (IRR) should be used for investments with more complicated cash flows. If the majority of an investment's return was generated in the early years of an investment, then the investment would have a higher ROI calculated using IRR than an investment that had steady returns throughout the same period.
ROI might not be a suitable calculation method for returns for certain investment options. When looking at real estate, there are costs that would reduce the amount of your investment gain, such as property taxes, insurance, and maintenance. The cap rate, or capitalization rate, is a better method to calculate the annual return of a real-estate investment that generates rental income.
What is Annualized Return on Investment?
Annualized return on investment is a better alternative to basic ROI as it allows you to compare different investment choices. You cannot compare two different investment options using basic ROI on its own if the length of the investment options are different. For example, if you were just told that two investment options yielded a ROI of either 1% or 10%, you most likely would choose the 10% ROI option. If you were then told that the 1% ROI option had an investment length of one day and the 10% ROI option had an investment length of 100 years, then you might reconsider your choice.
Annualized ROI allows you to compare investment options with different investment lengths. In the above example, a ROI of 1% after 1 day would result in an annualized ROI of 3,678.34%. A ROI of 10% after 100 years would have an annualized ROI of 0.09%. This allows you to quickly see that even though the basic ROI of the second investment option is higher, the annualized ROI of the first option shows that it would be a better investment. Of course, this assumes that there is the option to reinvest or invest in other investment options.
ROI vs Annualized ROI
|Initial Investment||Investment Gain||ROI||Holding Period||Annualized ROI|
|Investment A||$100||$1||1%||1 Day||3,678.34%|
|Investment B||$100||$10||10%||100 Years||0.09%|
An investor wants to calculate the return on investment for their stock investment. The stock cost the investor $100. After one year, the investor sold the stock for $110. The ROI calculation would be:
ROI = [($110 - $100) / $100] x 100% = 10%
A business wants to calculate the return on investment for a new machine purchase. The machine cost the company $1,000 but it was later not used by the business and produced no income. The business then sold the machine for $500.
ROI = [($500 - $1,000) / $1,000] x 100% = -50%