What is the ROI Calculator?
The Return on Investment (ROI) Calculator is the most fundamental metric in finance and business. It evaluates the raw efficiency and profitability of an investment by comparing the net profit generated directly against the initial capital cost required to start the venture.
How to Calculate Return on Investment (Formulas)
ROI is almost universally expressed as a percentage rather than a raw dollar amount, allowing investors to compare the efficiency of a $100 stock trade against a $1,000,000 real estate purchase.
- Net Profit: Final Value of Investment - Initial Cost of Investment.
- ROI Percentage Formula: (Net Profit / Initial Cost of Investment) * 100.
- Example: You buy $1,000 in stock. You sell it later for $1,200. The Net profit is $200. The ROI is (200 / 1000) * 100 = 20%.
Frequently Asked Questions
What is a "Good" ROI?
A "good" ROI depends entirely on the risk profile of the asset and the time it took to generate the return. Historically, the S&P 500 stock index generates an average annualized ROI of roughly 7% to 10% after inflation. Anything significantly higher than 10% annually usually carries a massive risk of losing your initial principal.
What is the flaw in the ROI formula?
The standard ROI formula completely ignores the concept of time. A 50% ROI sounds incredible, but if it took 30 years to generate that 50% return, it is actually a terrible investment that lost money to inflation. To account for time, sophisticated investors use the Annualized ROI formula or the Internal Rate of Return (IRR).
Can my ROI be negative?
Yes. A negative ROI simply means you lost money on the investment. If you buy a crypto token for $100 and panic-sell it later for $80, your net profit is -$20. Your calculated ROI is exactly -20%.