By Chron Contributor Updated September 23, 2020
Calculating your business' multi-year return expresses your overall profit during that period, but that figure's usefulness is limited to a single period's snapshot. A better expression of profit is converting the multi-year return to an annualized return, which expresses this multi-year return as if it spanned a single year.
Multi-Year Returns
A multi-year return is one of the simplest calculations, suggests Corporate Finance Institute, but also one of the most limited. This figure tells you what your total profits are over an extended period of time, but it doesn't enable you to compare investments or returns from differing lengths of time. The return is typically expressed as a percentage of your original investment, but can also simply convey a dollar value.
Calculating Multi-Year Returns
When expressed as a dollar value, a multi-year returns describes the amount of profit made over several years. As an example, if you made $10,000, $15,000 and $15,000 in three consecutive years, adding those figures produces a total return of $40,000. Dividing this total by your original investment and multiplying by 100 converts the figure into a percentage. Continuing with the example, if you originally invested $100,000 in the company, divide $40,000 by $100,000 and multiply by 100 to calculate a multi-year return of 40 percent.
Annual Rate of Return Definition
Annualized returns express periodic returns as an equivalent one-year value. This figure enables comparison between other investments’ annual returns, because the periods are the same. It also enables you to project your company's profits into the future, under the assumption that historic growth will be similarly sustained. Calculating the annualized return from a multi-year return takes into account annual variation, so the resulting figure more accurately represents your company’s performance, reports Indeed.com.
Calculate Annual Rate of Return
Converting a multi-year return into an annualized one effectively reverses the compound interest formula to back it up to a single year. However, this calculation uses the same formula, but the time period is a fraction of the multi-year period, such as 1/3 to represent a single year out of a three-year period. Adding 1 to the multi-year decimal return and raising it to the power of this fraction gives you the annual multiplier. Subtracting 1 from the result and multiplying by 100 converts the multiplier into the percent annualized return.
In the previous example, adding 1 to 0.40 and raising it to the power of 1/3 gives you a multiplier of 1.12. Subtracting 1 and multiplying by 100 gives you an annualized return of 12 percent.
FAQs
Calculating Multi-Year Returns
How to calculate annual return over multiple years? ›
Assume a $10,000 investment grows to $12,000 over a five year period. To calculate the total return over the period, divide the ending value by the beginning value and then subtract one. [ (12,000/10,000) – 1 = 0.20 = 20% ] It might seem like a 20% return over five years would equate to a 4% annual return.
What is the formula for annual period return? ›
Example of calculating annualized return
To calculate the total return rate (which is needed to calculate the annualized return), the investor will perform the following formula: (ending value - beginning value) / beginning value, or (5000 - 2000) / 2000 = 1.5. This gives the investor a total return rate of 1.5.
How do you measure average return over multiple periods? ›
The returns are added together to derive a total value, which is then divided by the number of returns in the set. Assume the security or portfolio you have invested in has generated the following annual returns over a period of four years: 20%, 8%, 16%, and 8%. So, your average return for a period of 4 years is 13%.
What is the formula for calculating annual return? ›
First, we subtract the end of year price from the beginning price, which equals 45 - 25, or 20. Next, we divide by the beginning price, or 20/25 equals . 80. Lastly, to arrive at a percentage, .
How do you calculate ROI for 3 years? ›
ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
How do I calculate annual return in Excel? ›
Annualized return
This is displayed as a percentage, and the calculation would be: ROI = (Ending value / Starting value) ^ (1 / Number of years) -1. To figure out the number of years, you'd subtract your starting date from your ending date, then divide by 365.
What is the total annual return? ›
An annualized total return is the geometric average amount of money an investment earns each year over a given period. The annualized return formula shows what an investor would earn over a period of time if the annual return were compounded.
How to annualize a 6 month return? ›
To annualize a number, multiply the shorter-term rate of return by the number of periods that make up one year. One month's return would be multiplied by 12 months while one quarter's return by four quarters.
What is a multi period return? ›
Chain linking returns or the geometric compounding of returns involves taking returns over a single-holding period and combining or linking those returns over multiple periods, resulting in the cumulative return of an investment.
Equity Multiple – The equity multiple measures the total return on the investment and is calculated by dividing the total cash received by the total equity invested, i.e. the cash received per dollar invested.
What is the difference between single period and multi period return? ›
Suppose you're making an investment, such as depositing your money in a bank. If you plan on leaving the money there for one year, you're making a single-period investment. Any investment for more than one year is called a multi-period investment.
How to calculate rate of return over time? ›
You can calculate the rate of return on your investment by comparing the difference between its current value and its initial value, and then dividing the result by its initial value.
What is annual return to annualized return? ›
An annual or annualized return is a measure of how much an investment has increased on average each year during a specific period. The annualized return is calculated as a geometric average to show what the annual return compounded would look like.
What is the difference between cumulative and annualized returns? ›
Annualized return is calculated by taking the average return over a specified period, typically one year. On the other hand, cumulative return sums up the total return over a specified period.
