Complete ROI Calculation Guide 2026

"They say it's a 20% return, but is that actually good?" "Real estate vs stocks - which has higher returns?"

ROI is the key metric for investment decisions. However, the same investment can show different returns depending on the calculation method. Understand ROI calculation properly with this guide.

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What is ROI?

ROI (Return on Investment): The ratio of profit to investment cost

ROI = (Profit - Investment Cost) / Investment Cost × 100%

or

ROI = (Final Value - Initial Investment) / Initial Investment × 100%

Basic Example

Investment: 10 million won
After 1 year: 12 million won

ROI = (12 - 10) / 10 × 100% = 20%

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Types of ROI Calculations

1. Simple ROI

The most basic calculation method

Simple ROI = (Total Return - Total Investment) / Total Investment × 100%

Example: 3-year investment

Investment: 10 million won
After 3 years: 15 million won

Simple ROI = (15 - 10) / 10 × 100% = 50%

Limitation: Doesn't consider time period. Can't distinguish between 50% over 3 years and 50% over 1 year.

2. Compound Annual Growth Rate (CAGR)

Annual return rate converted to compound interest

CAGR = (Final Value / Initial Investment)^(1/Years) - 1

Example: 3-year investment

Investment: 10 million won
After 3 years: 15 million won

CAGR = (15 / 10)^(1/3) - 1
     = (1.5)^0.333 - 1
     = 1.1447 - 1
     = 14.47%

Interpretation: Equivalent to growing 14.47% annually with compound interest

3. Annualized Return

Simple ROI converted to annual rate

Annualized ROI = Simple ROI / Investment Period (years)

Example: 50% return over 3 years

Annualized ROI = 50% / 3 = 16.67%

(Different from CAGR 14.47%! - Doesn't reflect compound effect)

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Practical ROI Calculation

Stock Investment

Purchase: 100 shares × 10,000 won = 1,000,000 won
Sale: 100 shares × 12,500 won = 1,250,000 won
Dividends: 50,000 won
Fees: 5,000 won

Net profit = 1,250,000 + 50,000 - 1,000,000 - 5,000 = 295,000 won
ROI = 295,000 / 1,000,000 × 100% = 29.5%

Real Estate Investment

Purchase price: 500 million won
Acquisition costs (tax, fees, etc.): 20 million won
Total investment: 520 million won

Sale price after 3 years: 600 million won
Selling costs: 10 million won
3-year rental income: 36 million won (1 million won monthly)

Net profit = 600M - 10M + 36M - 520M = 106 million won
Simple ROI = 106M / 520M × 100% = 20.4%
Annual CAGR ≈ 6.4%

Business/Marketing Investment

Marketing cost: 5 million won
Revenue increase: 20 million won
Additional costs (product costs, etc.): 12 million won

Net profit increase = 20M - 12M = 8 million won
ROI = 8M / 5M × 100% = 160%

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Various Return Metrics

ROIC (Return on Invested Capital)

ROIC = After-tax Operating Profit / Invested Capital × 100%

Invested Capital = Total Assets - Non-operating Assets - Non-interest Liabilities

Use: Evaluating corporate capital efficiency

ROE (Return on Equity)

ROE = Net Income / Shareholders' Equity × 100%

Use: Shareholder perspective profitability, stock investment analysis

ROA (Return on Assets)

ROA = Net Income / Total Assets × 100%

Use: Asset utilization efficiency

IRR (Internal Rate of Return)

The discount rate that makes the present value of cash flows equal to zero

Σ(Cash Flow_t / (1+IRR)^t) = 0

Use: Project investment evaluation, real estate development

Comparison Table

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Leverage and ROI

Leverage Effect

Equity only investment:
Investment: 100M (all equity)
After 1 year: 110M (10% increase)
ROI = 10%

Using leverage:
Investment: 100M (50M equity + 50M loan)
Loan interest: 5% annually = 2.5M won
After 1 year: 110M - 2.5M = 107.5M won

Equity profit = 7.5M won
ROI = 7.5M / 50M × 100% = 15%

Leverage increases return from 10% → 15%!

Leverage Risk

Decline scenario:
Investment: 100M (50M equity + 50M loan)
After 1 year: 90M won (10% decline)
Loan interest: 2.5M won

Loss = 100M - 90M - 2.5M = 12.5M won
ROI = -12.5M / 50M = -25%

Losses are also amplified by leverage when declining.

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Cautions When Comparing ROI

1. Standardize Time Periods

Investment A: 1-year ROI 15%
Investment B: 3-year ROI 40%

To compare:
B annualized: 40% / 3 = 13.3% (simple)
B CAGR: (1.4)^(1/3) - 1 = 11.9%

→ A is more efficient

2. Consider Risk

A: 10% annually (government bonds)
B: 15% annually (stocks)
C: 25% annually (cryptocurrency)

By returns alone: C > B > A
Risk-adjusted returns may differ

3. Factor in Taxes

Pre-tax profit: 10 million won

Financial income tax (15.4%): 1.54M won
Capital gains tax (22%): 2.2M won (overseas stocks)

After-tax profit is the real ROI

4. Consider Inflation

Nominal return: 8%
Inflation: 3%
Real return: approximately 5%

(Precisely: (1.08/1.03) - 1 = 4.85%)

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Average ROI by Investment Type

Historical Averages (Long-term)

2025-2026 Standards

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What's a Good ROI?

General Standards

Relative Standards

Risk-free return (government bonds) + Risk premium

Example: Gov bonds 3% + Stock premium 5-7% = 8-10% expected

Industry Standards

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ROI Calculation Practice

Excel/Google Sheets

Simple ROI:
=(Final Value-Initial Investment)/Initial Investment

CAGR:
=(Final Value/Initial Investment)^(1/Years)-1

or
=RATE(Years,0,-Initial Investment,Final Value)

Online Tools

At ROI Calculator:

1. Enter initial investment
2. Enter final value
3. Enter investment period
4. Check simple ROI and CAGR

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ROI Improvement Strategies

1. Cost Reduction

ROI = (Revenue - Cost) / Cost

When reducing costs by 10%:
Original: (100 - 80) / 80 = 25%
Reduced: (100 - 72) / 72 = 38.9%

2. Increase Turnover

20% return once per year vs 5% return quarterly

Once yearly: 20%
Quarterly: (1.05)^4 - 1 = 21.6%

3. Utilize Compound Effect

Reinvesting returns:
Year 1: 1,000 × 1.1 = 1,100
Year 2: 1,100 × 1.1 = 1,210
Year 3: 1,210 × 1.1 = 1,331

vs Withdrawing returns:
Years 1-3: 1,000 + 100×3 = 1,300

Difference: 310,000 won (3.1%)

4. Tax Optimization

Use tax-advantaged accounts (ISA, pension savings)
Hold long-term for capital gains tax reduction (domestic stocks)
Utilize loss offset

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FAQ

Q1: Are ROI and rate of return the same thing?

A: Similar but context-dependent. ROI refers to profit relative to investment, while rate of return has a broader meaning of increase rate.

Q2: Is negative ROI always a failure?

A: No. Could be initial investment stage, learning costs, or temporary decline during long-term investment. Consider overall portfolio and goals.

Q3: Should I be suspicious of very high ROI?

A: Yes. "Guaranteed" returns of 30%+ annually are mostly scams (Ponzi). High returns come with high risk.

Q4: Can I add up ROI from multiple investments?

A: Simple addition is incorrect. Calculate investment-weighted average or total portfolio ROI.

Portfolio ROI = Σ(Investment Weight × Individual ROI)

Q5: Realized vs Unrealized ROI?

A:

• Realized ROI: Confirmed profit after actual sale
• Unrealized ROI: Based on current valuation (not yet sold)

Taxes apply only to realized ROI.

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Conclusion

Key ROI calculation points:

1. Basic formula: (Profit - Investment) / Investment × 100%
2. Time adjustment: Annualize with CAGR
3. Comparison criteria: Consider risk, taxes, inflation
4. Good ROI: Relative (risk-free rate + α)
5. Leverage: Amplifies both gains and losses

ROI is about context, not just numbers.

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