How is ROI calculated?
ROI (Return on Investment) is the simplest way to measure how profitable an investment was. It's the net profit divided by the original cost, expressed as a percentage.
ROI = (Final Value − Initial Value − Fees) ÷ Initial Value × 100
What is CAGR?
CAGR (Compound Annual Growth Rate) is the annualized rate of return. It tells you what your average yearly return was, assuming profits were reinvested each year.
CAGR = (Final / Initial)1/years − 1
For example, $10,000 growing to $14,500 over 3 years gives CAGR of (14500/10000)1/3 − 1 ≈ 13.2% per year.
ROI vs CAGR — when to use which?
- ROI is best for short-term or one-off investments.
- CAGR is best for comparing investments over different time horizons (e.g. a 3-year investment vs a 10-year investment).
- For stocks held many years, CAGR is the standard metric.
Frequently asked questions
What is ROI?
ROI measures the profitability of an investment as a percentage. ROI = (Net Profit / Cost) × 100.
What is CAGR?
CAGR is the annualized rate of return, assuming profits are reinvested each year.
When should I use CAGR vs ROI?
Use ROI for total return. Use CAGR when comparing investments over different time periods.