How to Calculate ROI (and Annualize It)
The basic return-on-investment formula, how to compare investments of different lengths, and what ROI misses.
4 min read
Step by step
- ROI = (gain − cost) ÷ cost × 100.
- Include every cost: fees, shipping and your time.
- Annualize with (final ÷ initial)^(1 ÷ years) − 1 to compare fairly.
- Example: 24% over six years is only about 3.7% per year.
Key takeaway: Always annualize before comparing two investments.
The basic formula
ROI = (gain − cost) ÷ cost × 100. An investment of $5,000 that returns $6,200 has an ROI of (1,200 ÷ 5,000) × 100 = 24%. It works for stocks, marketing campaigns, equipment and education alike.
Include all costs — fees, shipping, your time at a fair rate — or the ROI flatters the investment.
Annualizing for fair comparisons
A 24% return over one year is excellent; over six years it is mediocre. Annualized ROI = (final ÷ initial)^(1 ÷ years) − 1 converts any holding period to a per-year rate: that 24% over six years is about 3.7% per year.
Always annualize before comparing investments of different lengths — total return alone is misleading.
What ROI does not capture
ROI ignores risk, liquidity and cash-flow timing. Two projects with identical ROI can differ wildly in how likely the return is and when the money arrives.
Use ROI as a first filter, then layer in risk and time value of money for serious decisions.