Return on Investment (ROI) Calculator

Maximizing Investment Returns

Return on investment, often referred to as ROI, is a measurement used to calculate the amount of profit (or return) you receive from an investment. This metric calculates the ROI for various investments, including businesses, real estate, stocks, and collectibles. ROI is represented as a percentage return of the initial investment amount.

Let’s take an example. XYZ Corporation invested $1,000,000 to open a new restaurant. The restaurant was extremely popular and generated $3,000,000 in profit. The return was $2,000,000 above the initial investment giving XYZ Corporation an ROI of 200%.

In most cases, the goal of a business owner is to achieve the highest ROI percentage. However, it’s important to note that investments that traditionally have the highest returns also have the highest risk. Investors need to decide how much risk they are willing to take on to achieve a certain ROI. No investment returns are ever guaranteed.

ROI is also used to find a breakeven point. For example, suppose a company purchases a piece of equipment for their factory for $100,000. In that case, they can use ROI to find out how long it will take for the equipment to generate enough profit to pay for itself.

How to Use the ROI Calculator

You need very little information to calculate a return on investment. The amount invested is the total amount you paid for the asset. Amount returned is the final amount left after the sale of the asset.

Investment time is used to calculate the annualized ROI.

• Step 1: Enter the information in the fields and click Calculate. For the investment time, you can use specific dates (if known) or a length of time (Example: 4.5 years).
• Step 2: Review the results. The calculator will provide the following information: investment gain, total ROI, and annualized ROI. There is also a pie chart showing the percentage of value invested versus profit.

Real Examples

Let’s say you have an interest in flipping houses. You plan to buy a house that needs to be repaired, fix it up, and resell it for a profit. You find a house that costs $250,000 and remodel it for $50,000. Your total investment is $300,000.

After completing the work (six months later), you sell the house to someone for $450,000. You want to calculate your ROI for the project.

Next, enter the following values:

• Amount Invested: $300,000
• Amount Returned: $450,000
• Investment Time: Select Use Length and enter 0.5

Once you hit the Calculate button, you’ll see that your investment profit was $150,000 with a total ROI of 50% and an annualized return of 125%.

Understanding the Basic ROI Formula

Calculating ROI is one of the most simple yet powerful financial calculations. Leveraging this calculation can help you quickly evaluate investments and make wise financial decisions.

The formula to calculate ROI is:

$$ROI = \frac{R - I}{I} × 100\%$$

• I = The initial amount invested plus any other costs.
• R = The amount returned at the end of the investment period.

Note: The calculation must be multiplied by 100 to convert the decimal number to a whole percentage.

Annualized ROI

Most investments occur over several years, if not decades. Our return on investment calculator also considers the investment time to return an annualized ROI. This tells you the amount of profit made for each year of holding the investment. An annualized ROI calculator can help investors compare two different investments.

The formula to calculate an annualized ROI is:

$$Annualized\ ROI = [(1 + ROI)^{1/n} - 1] × 100\%$$

• n = Number of years investment is held.

Let’s compare two different investments to understand why annualized ROI is a better metric than the traditional rate of return formula. Investment A has a total ROI of 250%. Investment B has a total ROI of 150%. Most people would assume that Investment A is the better option. However, Investment A must be held for 7 years, and Investment B only needs to be held for 3 years. When factoring in investment time, Investment B has an annualized return of 50%, while Investment A only returns about 35%.

Key Benefits and Helpful Tips

The return on investment calculation can be a powerful tool for investors. Knowing how to use the ROI formula can help you quickly spot profitable investments and business opportunities.

Key Benefits:

• No Memorizing Formulas - A mistake in the ROI calculation can result in a poor investment decision. Relying on this ROI calculator can ensure that your ROI calculation is done correctly.
• Calculating Short-Term Investments - Returns over a short period of time, such as a few weeks, can be difficult to calculate. The date fields make this easy if you know exactly when you purchased and sold the asset.

Helpful Tips:

• Negative ROI - Unfortunately, there may be some situations where the amount returned at the end of an investment is less than the initial investment. A negative ROI is usually a bad sign. Still, it can help the investor decide when to sell an asset to minimize the losses.
• ROI Projections - You don’t have to wait until you sell the asset to calculate ROI. You can calculate your anticipated ROI by using the asset’s current market value or what you expect the value to be in the future.
• Calculating Benefit of Investment Loans - Many investors use loans (or leverage) to purchase investment assets. An ROI calculation can help an investor decide whether the investment profit will be higher than the loan interest cost.