Methodology and Expert Guidance
Authoritative Data Source and Methodology
Primary references:
- CFA Institute, “Measuring Investment Returns: ROI and CAGR,” 2023. URL: cfainstitute.org
- U.S. SEC, Investor.gov — “Compound Interest and CAGR,” updated 2024. URL: investor.gov
Tutti i calcoli si basano rigorosamente sulle formule e sui dati forniti da questa fonte.
The Formula Explained
Net profit:
$$ \text{Net Profit} = \bigl(\text{Final Value} + \text{Income} - \text{Costs}\bigr) - \text{Initial Investment} $$
Return on Investment (ROI):
$$ \text{ROI}(\%) = \frac{\text{Net Profit}}{\text{Initial Investment}} \times 100 $$
Annualized ROI (CAGR):
$$ \text{CAGR} = \left(\frac{\text{Final Value} + \text{Income} - \text{Costs}}{\text{Initial Investment}}\right)^{\tfrac{1}{t}} - 1 \quad \text{where } t \text{ is time in years} $$
Break-even final value (ROI = 0):
$$ \text{Break-even Final} = \text{Initial Investment} + \text{Costs} - \text{Income} $$
Note: The CAGR expression assumes distributions are reinvested or treated as part of the ending value. When cash flows occur mid-period without reinvestment, time-weighted or money-weighted returns may be more appropriate.
Glossary of Variables
- Initial investment: Capital put to work at the start.
- Final value: Ending value or total sale proceeds.
- Income: Cash received during the period (e.g., dividends, coupons).
- Costs: Fees, commissions, or taxes paid.
- Net profit: Final net value minus initial investment.
- ROI (%): Net profit as a percentage of initial investment.
- Annualized ROI (CAGR): Constant yearly growth rate over the holding period.
- MoIC: Multiple on Invested Capital = Final Net Value / Initial Investment.
- Break-even final value: Minimum final value for ROI to equal zero.
How It Works: A Step-by-Step Example
Suppose you invest 10,000; after 18 months you sell for 12,200, receive 200 in dividends, and pay 50 in fees.
- Initial investment = 10,000
- Final value = 12,200
- Income = 200
- Costs = 50
- Holding period t = 18 months = 1.5 years
Net Profit = (12,200 + 200 − 50) − 10,000 = 2,350.
ROI(%) = (2,350 / 10,000) × 100 = 23.5%.
CAGR = ((12,200 + 200 − 50) / 10,000)^(1/1.5) − 1 = (12,350 / 10,000)^(0.6667) − 1 ≈ 0.1504 = 15.04% per year.
Break-even Final = 10,000 + 50 − 200 = 9,850.
Frequently Asked Questions (FAQ)
Is ROI the same as profit margin?
No. Profit margin divides profit by revenue; ROI divides profit by the initial investment.
Which period should I use for annualization?
Use the actual holding period from the start to the end date. Convert days or months to years for CAGR.
What if I made additional contributions during the period?
Simple ROI can be misleading with external cash flows. Consider money-weighted returns (IRR) or time-weighted returns for more precision.
Can I use this tool for projects, not just securities?
Yes. As long as you can define initial cost, final value, income, and costs, the ROI framework applies.
What is a “good” ROI?
It depends on risk, time, and benchmarks (e.g., your cost of capital, market index). Higher ROI with adequate risk controls is generally preferred.
Why does CAGR differ from ROI?
ROI ignores time, while CAGR annualizes performance. For multi-period comparisons, CAGR is usually more informative.
Authorship and Review
Tool developed by Ugo Candido. Content verified by CalcDomain Editorial Board.
Last reviewed for accuracy on: .