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Annualized ROI Calculator (CAGR)
A raw ROI figure hides how long it took to earn, which makes returns of different durations impossible to compare fairly. Annualized ROI — the compound annual growth rate, or CAGR — fixes this by expressing the return as an equivalent steady yearly rate: annualized = (returned / invested)^(1/years) − 1. A 100% total return sounds impressive, but earned over 4.526 years it is only 16.55% a year: (2)^(1/4.526) − 1 = 16.55%. Crucially, annualized ROI is NOT the simple ROI divided by the number of years — that ignores compounding and overstates the rate. Enter the amount invested, the amount returned and the holding period to get the CAGR, the one figure that lets you compare a two-year and a ten-year investment on equal terms. Free, no login. This is a business tool, not investment advice.
Annualized ROI (CAGR) = (returned / invested)^(1/years) − 1
- Equivalent form: annualized = (1 + simple ROI)^(1/years) − 1
- Simple ROI = (returned − invested) / invested — the total return, ignoring time
- Worked example — invest $50,000, return $70,000: simple ROI = 40%
- Worked example — 100% total return over 4.526 years: (2)^(1/4.526) − 1 = 16.55% a year
- Do NOT divide simple ROI by years — that ignores compounding and overstates the annual rate
- CAGR lets you rank investments of different durations on a like-for-like yearly basis
Frequently asked questions
What is annualized ROI and how is it different from simple ROI?
Simple ROI is the total return over the whole holding period: (returned − invested) / invested. Annualized ROI (CAGR) converts that into an equivalent steady yearly rate using annualized = (returned / invested)^(1/years) − 1. The difference matters because simple ROI ignores time — a 40% total return is very different if earned in one year versus ten. Annualized ROI puts every investment on a per-year footing, so a 100% return over 4.526 years (16.55% a year) can be compared directly against, say, a 50% return over two years (22.5% a year).
How do I calculate annualized ROI?
Divide the final amount by the amount invested, raise the result to the power of 1 divided by the number of years, and subtract one. For $50,000 growing to $100,000 over 4.526 years: (100,000 / 50,000)^(1/4.526) − 1 = 2^0.221 − 1 = 16.55%. Equivalently, if you already know the simple ROI, use (1 + ROI)^(1/years) − 1. The key is the fractional exponent, which accounts for compounding — dividing the simple ROI by the number of years would give a higher, incorrect figure.
Why shouldn't I just divide my total ROI by the number of years?
Because that treats the return as if it were earned in equal simple slices with no compounding, which overstates the true annual rate. A 100% return over 4.526 years divided naively gives 22.1% a year, but the correct compound figure is 16.55% — the difference is the effect of growth compounding on itself each year. For any multi-year horizon, use the CAGR root, not division. Only over a single year do the two methods agree.