Why not divide total return by the years?

Because the money compounded. A fifty percent gain over three years is 14.5 percent a year, and dividing gives 16.7, which overstates by two points.

What is a real return?

The return after inflation, which is what says whether your purchasing power grew. A nominal eight percent in a seven percent inflation year is under one percent real.

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ROI Calculator

Return on investment, annualised and adjusted for inflation and tax. Total return cannot be compared across different holding periods, and dividing it by the years overstates because it credits none of the return with compounding.

Also called: return on investment calculator, investment gain percentage.

ROI

50%

50% total return on $100,000 invested. Annualised over 3 years that is 14.47% a year, which is the figure to compare against anything else. Enter inflation to see the real return, which is what says whether purchasing power grew. No tax applied. Most investment gains are taxable, which reduces the comparable figure.

Annualised return

14.47%

Net profit

$50,000.00

Total cost including ongoing

$100,000.00

Real annualised return after inflation

14.47%

Post-tax return

50%

Profit after tax

$50,000.00

Years to recover the cost

On inflation

Enter inflation to see the real return, which is what says whether purchasing power grew.

On tax

No tax applied. Most investment gains are taxable, which reduces the comparable figure.

How this is calculated

Method and background

How this is calculated

Net profit over cost gives total return. Annualising it takes a root rather than dividing, since the money compounded: a fifty percent gain over three years is 14.5 percent a year, not 16.7. Ongoing costs add to the base and are routinely omitted. Inflation converts the nominal figure into a real one, which is the number that says whether purchasing power grew, and in a high inflation period a positive nominal return can be a real loss.

the annualised figure is a root, not a division, which is why dividing total return by years overstates

G: Value returned
C: Cost

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

a 50 percent gain over three years

Value returned: $150,000.00
Amount invested: $100,000.00
Over how many years: 3
Ongoing cost each year: $0.00
Inflation over the period: 0%
Tax on the gain: 0%

ROI50%

the cube root of 1.5 less one, not 50 divided by 3

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inflation turns a nominal gain into a small real one

Value returned: $150,000.00
Amount invested: $100,000.00
Over how many years: 3
Ongoing cost each year: $0.00
Inflation over the period: 12%
Tax on the gain: 0%

ROI50%

boundary: 1.14471/1.12 - 1, most of the nominal return consumed

Open this example

Method and limits

What it assumes

A single outlay at the start and a single return at the end.

What it deliberately does not model

Irregular cash flows need XIRR rather than this.
It ignores risk entirely, so two investments with the same ROI are not equivalent.
Attribution of the gain to the investment is often the weakest part of the calculation.

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Frequently asked questions

Why not divide total return by the years?: Because the money compounded. A fifty percent gain over three years is 14.5 percent a year, and dividing gives 16.7, which overstates by two points.
What is a real return?: The return after inflation, which is what says whether your purchasing power grew. A nominal eight percent in a seven percent inflation year is under one percent real.