2026-02-14 • Updated 2026-02-14 • 11 min read
ROI vs CAGR: What’s the Difference and How to Calculate Annualized Returns
A practical ROI vs CAGR guide with formulas, examples, and when to use each metric for annualized return analysis.
By InterestCal Editorial
ROI vs CAGR: Core Difference
ROI measures total return over an entire holding period, while CAGR estimates the equivalent annualized growth rate. They are related but not interchangeable.
If you compare investments with different durations, CAGR is usually the fairer metric. You can compute both quickly with the ROI + CAGR Calculator.
Formulas You Need
ROI formula: (Final Value - Initial Value) / Initial Value. CAGR formula: (Final Value / Initial Value)^(1/Years) - 1.
ROI tells you magnitude, CAGR tells you time-normalized efficiency. In ranking decisions, time normalization is often critical.
When to Use ROI
Use ROI for quick profitability snapshots, especially when duration is similar across opportunities or when you are reviewing one completed investment.
For direct ROI-only workflows, use the ROI Calculator and then validate annualized perspective with CAGR where needed.
When to Use CAGR
Use CAGR for comparing opportunities over different time periods, benchmarking long-term strategy quality, and communicating annualized expectations.
Keep in mind CAGR smooths volatility and does not capture drawdown path risk. Pair it with risk analysis when making capital allocation decisions.
Practical Example
Two investments can show the same ROI but different CAGR if one takes much longer to reach the same end value. That longer duration typically means lower annualized capital efficiency.
For a deeper walkthrough, read ROI vs CAGR: Which Return Metric to Use.
Conclusion
Use ROI for total outcome and CAGR for annualized comparison. Together they provide a stronger return lens than either metric alone.
Start with the annualized return calculator and then stress-test assumptions with inflation and risk tools.
Frequently Asked Questions
What is the main difference between ROI and CAGR?
ROI is total period return; CAGR is annualized return adjusted for holding period length.
Which metric is better for comparing two investments?
CAGR is usually better when time horizons differ, because it normalizes results annually.
Can ROI be high but CAGR be low?
Yes, if the investment took many years to achieve that ROI.
Does CAGR account for volatility?
No. CAGR smooths the path and should be paired with drawdown or risk analysis.
Where can I calculate annualized returns quickly?
Use an ROI + CAGR calculator and enter initial value, final value, and holding period.
