Return on investment measures how much you gained relative to what you put in. It's the common yardstick for comparing investments — but to compare fairly across different time spans, you also want the annualized return.
Total vs. annualized
Total ROI is simply the gain divided by the initial amount. Annualized return converts that into a constant yearly rate, so a 50% gain over three years (about 14.5% per year) can be compared with a 20% gain over one year.
ROI ignores risk and cash flows along the way, so treat it as one input among several rather than the whole picture.
A worked example
Put $1,000 into something and sell it for $1,500 three years later. Your net gain is $500 and your total ROI is 50%. Spread across three years, though, the annualized return is about 14.5% — the steady yearly rate that would compound $1,000 into $1,500.
Quoting the 50% without the timeframe makes a slow investment look like a fast one. A 50% total return over ten years is only about 4% a year; the same 50% in one year is a spectacular result. Always pair a total return with how long it took.
What ROI leaves out
Basic ROI ignores risk, fees, taxes, and the timing of any cash flows in between. Two investments with identical ROI can differ wildly in how much volatility, cost, and stress got you there. A volatile bet and a steady one can post the same number while being completely different propositions.
It also says nothing about opportunity cost — what the same money could have earned elsewhere. Use ROI to measure an outcome, but judge a decision on the full picture of risk, liquidity, and alternatives.