How is return on investment calculated?
ROI tells you what you earned relative to what you put in. Here's the formula, worked examples, the total-vs-annualised trap most people miss — and why a high past return still doesn't tell you if a stock is worth buying today.
The formula
Return on investment is simply your gain divided by your cost:
ROI = (value now − amount invested) ÷ amount invested × 100
If you put in £1,000 and it's now worth £1,250, your ROI is (1,250 − 1,000) ÷ 1,000 × 100 = 25%. Straightforward enough — but there's a catch most people miss.
Total return vs annualised return
That 25% is your total return — but over what period? If it took five years to earn 25%, that's very different from earning 25% in one year.
To compare fairly, you annualise it — the compound annual growth rate (CAGR): ((value now ÷ amount invested) ^ (1 ÷ years)) − 1. A 25% total return over five years works out to about 4.6% a year. The same 25% in a single year is 25% a year. Same headline number, wildly different performance.
This is exactly why Oak Growth shows returns as annualised figures (avg/yr) rather than raw totals — so a 10-year return and a 1-year return can be compared on the same footing, not mistaken for each other.
Why ROI alone won't tell you what to buy
Here's the crucial part: ROI is backward-looking. It tells you what an investment did, not what it's worth now. A stock that returned 200% over the last decade might be wildly overpriced today — or still a bargain. Past return can't tell you which.
To know whether a stock is worth buying at today's price, you need its intrinsic value — what the business is actually worth based on its future cash flows — and then compare that to the price to get your margin of safety.
That forward-looking calculation is harder to do by hand, which is exactly what our calculator is for.
Work out what a stock is really worth
ROI looks backward. To see whether a stock is undervalued today, the Oak Growth intrinsic-value calculator estimates fair value from the company's fundamentals and shows your margin of safety at the current price.
See the Oak Growth calculatorCommon questions
What is a good ROI for stocks?
Historically, broad stock markets have returned roughly 7–10% a year on average over the long run, though any single year varies widely and past performance doesn't guarantee future results. Compare returns on an annualised basis, not as raw totals over different periods.
What's the difference between total and annualised return?
Total return is the overall percentage gain across the whole period. Annualised return (CAGR) spreads that gain across the number of years so you can compare investments held for different lengths of time on equal footing.
Does a high ROI mean a stock is a good buy?
Not on its own. ROI measures past performance, not current value. A stock can have a high historical return and still be overpriced today. To judge whether it's worth buying now, compare its price to its intrinsic value.