How to calculate ROI
ROI is calculated by subtracting the initial cost from the final value, dividing the result by the initial cost, and multiplying by 100 to express it as a percentage. A positive ROI means the investment grew in value; a negative ROI means a loss. The metric is simple and universally understood, but it has an important limitation: it does not account for the time period over which the return was earned.
The annualised return corrects for time by using the compound annual growth rate (CAGR) formula. An investment that returns 50% total over five years has an annualised return of about 8.45% per year, not 10%. CAGR assumes the investment grows at a constant rate each year and is the standard metric for comparing investments held for different lengths of time.
ROI = ((Final value - Initial cost) / Initial cost) x 100
Net profit divided by the initial investment cost, expressed as a percentage.
Annualised return = ((Final value / Initial cost)^(1 / years) - 1) x 100
Compound annual growth rate, expressing the equivalent constant annual return that would produce the same total result over the holding period.
Multiple = Final value / Initial cost
The investment multiple shows how many times the original capital has grown. A 2x multiple means the investment doubled.