ROI calculator
A 50% return sounds identical whether it took one year or ten, and it is not remotely the same investment. Annualised, one year at 50% is 50% a year; ten years at 50% is 4.1% a year; below inflation for much of the last decade. Any comparison of returns over different holding periods that does not annualise first is comparing nothing at all.
Past returns say nothing about future ones. This is arithmetic on figures you supply, not investment advice.
ROI is profit divided by cost. Turning 10,000 into 15,000 is a 50% return; spread over three years that annualises to 14.5% a year. Always annualise before comparing investments held for different lengths of time.
How to calculate ROI
Simple ROI ignores two things that usually matter. The first is timing: money returned early can be reinvested, and internal rate of return exists as the more rigorous measure for uneven cash flows. The second is what else you could have done with the money; a 6% return is excellent against cash and poor against a broad equity index over the same period. Neither of those makes ROI useless. They make it the beginning of an analysis rather than the end.
Fees are the part most people leave out
Put 1.5% of transaction cost on the way in and 1% on the way out of the example above and the return falls from 50% to 46.31%, and the annualised figure from 14.471% to 13.524%. Two and a half per cent of round-trip cost took nearly a full percentage point a year off the result. Ongoing charges do more damage again, because they are levied every year against a balance that is meant to be growing. The only reliable way to keep them in the answer is to add every entry cost to the amount invested and subtract every exit cost from the value on exit before either figure reaches the fields above.
What the payback row is, and is not
The payback figure divides the holding period by the return ratio, which is the same as asking how long the original cost takes to come back at the average annual profit observed so far. On the defaults that is $1,666.67 a year against a $10,000 cost, so six years. It is a straight line, so it compounds nothing and assumes the same pace continues, and on a loss it returns a negative number that means nothing at all. Read it as a rough recovery period on a profitable holding and ignore it otherwise.
What people use it for
- Comparing two completed investments
- Assessing a property or business purchase
- Judging a marketing or capital spend
- Converting a total return into an annual one
- Putting a number on what transaction costs took out of a result
Questions
Subtract cost from final value, divide by cost, multiply by 100. Turning $10,000 into $15,000 is a 50% return and a 1.5× multiple.
The constant yearly rate that would produce the same total return. Fifty per cent over three years is 14.471% a year; the same 50% over ten years is 4.138%.
Yes, and the effect is larger than it looks. A 1.5% entry cost and a 1% exit cost on the example above cut the return from 50% to 46.31% and the annualised figure by nearly a point.
How long the original cost takes to come back at the average annual profit so far: six years on the defaults. It is a straight-line extrapolation, so it does not compound and it is meaningless on a loss.
Because the formula divides by a negative return. The row still renders a number and the number carries no meaning; use the annualised row instead, which handles a loss correctly at −7.168% a year for a $10,000 position now worth $8,000 after three years.
Only as a paper figure. Nothing has been realised, no exit costs have been paid and no tax has been assessed, so an unsold position flatters itself on all three counts.
It depends on risk and alternatives. Compare against what the same money could have done elsewhere over the same period, annualised, and against what you would have accepted losing.
ROI ignores when cash arrives; IRR accounts for the timing of every flow. Two investments with identical ROI have different IRRs if one returned most of the money early.