Investment analysis / profitability

Return on investment

Measure what an investment actually returned after every cost, then annualise it so a three-year hold and a three-month trade can be compared on equal terms. The cost base and the return are broken out line by line.

OutcomeProfitableCost base$21,500Break-even exit$21,500

+39.53%

Net profit divided by the total cost base

Net profit

$8,500

Total return minus total cost

Annualised ROI

+11.74%

Geometric rate over 3.00 years

Return multiple

1.40×

Total return per unit of cost base

Investment cash-flow breakdown

Every component of the cost base and the return, so the ROI denominator is never ambiguous.

3.00 year hold

Investment cash-flow breakdown
Line item	Amount	Share of cost base
Initial investment	$20,000	93.0%
Additional costs	$1,500	7.0%
Total cost base	$21,500	100.0%
Exit / final value	$28,000	—
Income received	$2,000	—
Total return	+$8,500	—

ROI uses the total cost base, not just the initial cheque. Including fees and improvement costs is what separates ROI from a simple price change.

Cost base vs total return

What went in, what came out, and the profit in between.

Value path at the annualised rate

Compounding the cost base forward at the solved annualised ROI.

Canonical equations

The exact relationships implemented by this engine.

π = (V_exit + Income) − (Cost₀ + Costs) · all-in, after fees

ROI = π / (Cost₀ + Costs) · the denominator is the full cost base

r = (1 + ROI)^(1/n) − 1 · geometric, not ROI ÷ n

M = (V_exit + Income) / Cost base · a 1.4× multiple is a 40% ROI

Show model notation and computationOpen the symbolic form, the variable definitions, and the step-by-step derivation when you need the detail.

A clear path from inputs to results.

ROI is net profit divided by what you put in. The arithmetic is trivial; the discipline is in the denominator. Fees, transaction costs and improvement spend all belong in the cost base, and leaving them out is the most common way an ROI calculation flatters an investment.

Step-by-step methodWorked exampleAssumptions explained

How to use

Enter the initial amount invested.

Add any additional costs — fees, closing costs, stamp duty, improvements.

Enter the final or exit value of the investment.

Add any income received along the way, such as rent or dividends.

Set the holding period so the return can be annualised.

Compare the annualised figure, not the raw ROI, against alternative uses of the money.

The formula

\mathrm{ROI} = \frac{(V_{\text{exit}} + \text{Income}) - (\text{Cost}_0 + \text{Costs})}{\text{Cost}_0 + \text{Costs}}, \qquad r_{\text{annual}} = (1+\mathrm{ROI})^{1/n} - 1

Reference: Brigham & Ehrhardt, "Financial Management: Theory & Practice", ch. 11 (profitability measures).

Worked example

$20,000 invested, exited at $28,000 after three years (default inputs)

Inputs

Initial investment $20,000.
Additional costs $1,500.
Exit value $28,000.
Income received $2,000.
Holding period 3 years.

Calculation path

1
Cost base: 20,000 + 1,500 = $21,500.
2
Total return: 28,000 + 2,000 = $30,000.
3
Net profit: 30,000 − 21,500 = $8,500.
4
ROI: 8,500 / 21,500 = 39.54%.
5
Annualise: 1.3954^(1/3) − 1 = 11.75% a year.

Result

ROI 39.54% · annualised 11.75% · net profit $8,500 · return multiple 1.40×.

Interpreting the result

The raw ROI of 39.5% over three years is the same economic result as 11.75% a year compounded. Comparing the raw figure against a one-year investment is the classic error — always annualise before ranking. The return multiple of 1.40× says the same thing in a different unit: every dollar of cost base came back as $1.40.

Assumptions & limitations

The cost base includes all cash outlays, but not the opportunity cost of the capital.

Income is counted when received, not reinvested. Reinvestment would raise the effective return.

The holding period is a single number; irregular cash flow timing needs an IRR calculation.

No taxes are modelled. After-tax ROI is lower and depends on the tax treatment of gains versus income.

Exit value is a realised or estimated price, not a marked-to-market figure along the way.

Frequently asked questions

What is the difference between ROI and annualised ROI?

ROI is the total percentage gain over the whole holding period. Annualised ROI converts it into a compound yearly rate. A 39.5% three-year ROI is 11.75% a year — the annualised number is what you compare against alternatives.

Should fees be included?

Yes, always. A 1% annual fee on a 7% gross return consumes roughly a quarter of the real return over twenty years. Omitting fees turns a mediocre investment into an apparently good one.

How do I handle partial exits?

Either use the total proceeds received to date and mark the remaining position at its current value, or compute an IRR on the dated cash flows. Simple ROI cannot express partial realisations cleanly.

Why is dividing ROI by the number of years wrong?

Because it ignores compounding. Dividing 39.5% by three gives 13.2%, which is too high; the correct compound rate is 11.75%. The error grows with the holding period and the size of the return.

Can ROI be negative?

Yes. If the total return is below the cost base, net profit is negative and ROI is negative. A −100% ROI means the entire investment was lost.

Is ROI the same as return on equity?

No. ROI measures return on the total capital deployed; ROE measures return on shareholders’ equity only, so it rises mechanically with leverage. Mixing them up makes leveraged investments look better than they are.