ROI Calculator

ROI vs. CAGR

ROI (return on investment) answers a simple question: how much did you gain or lose relative to what you put in? It’s a percentage of profit over your total cost basis.

CAGR (compound annual growth rate) answers a different question: what steady annual rate would turn your cost basis into your final value over the holding period? CAGR is useful when comparing investments held for different lengths of time.

This calculator includes optional additional costs so you can model fees, transaction costs, or improvements. Those costs increase your cost basis and reduce both ROI and CAGR.

Cost basis: the part people often forget

ROI can look much better (or worse) depending on what you include as “cost.” A realistic cost basis often includes more than the purchase price: closing costs, fees, repairs, improvements, and other cash outflows that were required to achieve the final value.

Including costs makes ROI a better decision tool because it reflects your true cash invested. If you are comparing two opportunities, the one with the higher headline profit may not have the higher ROI after you account for the full cost basis.

When CAGR is the better comparison metric

CAGR is especially useful when holding periods differ. A 30% ROI earned over 1 year is very different from 30% over 8 years. CAGR converts the outcome into an annualized rate, making comparisons more apples-to-apples.

CAGR still simplifies reality. It assumes a smooth rate of growth and ignores interim cash flows such as dividends, rent, or periodic contributions. For those cases, IRR (internal rate of return) is often more appropriate.

How to use ROI results in practice

Use ROI as a quick snapshot and CAGR as a comparison tool. If both are strong, the investment likely performed well. If ROI is high but CAGR is low, the investment may have taken a long time to deliver its gains.

Finally, compare ROI/CAGR to alternatives and to risk. A higher return is not always “better” if it required much higher risk, leverage, or concentration. Use these metrics as part of a broader decision process.

Limitations: taxes, inflation, and leverage

ROI and CAGR are usually calculated on pre-tax numbers. In many real investments, taxes can materially change outcomes. For example, capital gains taxes, depreciation recapture, or ordinary-income taxation on distributions can reduce net returns. If taxes are relevant, treat this calculator as a starting point and adjust based on your situation.

Inflation can also change how you interpret results. A 6% CAGR during a period with 4% inflation implies a much smaller “real” return. If your goal is future purchasing power, compare your CAGR to your inflation expectation or compute a rough real return by subtracting inflation from CAGR.

Leverage amplifies both gains and losses. If your investment used borrowing (for example, a mortgage on a rental property), ROI and CAGR based on equity invested can look very different from returns on the total asset value. Make sure you’re comparing like-for-like when evaluating opportunities.