Calculate Cagr in Excel

CAGR Calculator

Use this calculator to determine the Compound Annual Growth Rate (CAGR) of an investment or business metric over a specified period.

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Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a crucial metric used to measure the average annual growth of an investment or any other value over a specified period longer than one year. It provides a smoothed annual rate of return, assuming that profits are reinvested at the end of each year of the term.

What is CAGR?

CAGR is not the actual return in any single year, but rather a hypothetical growth rate that, if applied consistently over the investment period, would result in the final value from the initial value. It effectively smooths out volatile returns, making it easier to compare the performance of different investments or business segments over time.

The CAGR Formula

The formula for calculating CAGR is:

CAGR = ((Ending Value / Starting Value)^(1 / Number of Years)) - 1

• Ending Value: The investment's value at the end of the period.
• Starting Value: The investment's value at the beginning of the period.
• Number of Years: The total number of years over which the investment grew.

The result is typically expressed as a percentage.

Why is CAGR Important?

1. Performance Comparison: CAGR allows for a standardized comparison of different investments or projects, even if they have different durations or fluctuating annual returns.
2. Smoothing Volatility: Unlike simple annual growth rates, CAGR accounts for compounding and provides a more realistic picture of average growth by smoothing out the effects of volatility.
3. Forecasting: While past performance doesn't guarantee future results, CAGR can be used as a basis for projecting future growth, assuming similar conditions persist.
4. Business Analysis: Businesses use CAGR to track the growth of revenue, market share, customer base, or other key performance indicators over several years.

Limitations of CAGR

While powerful, CAGR has its limitations:

• Assumes Smooth Growth: It presents a hypothetical smooth growth rate, which rarely reflects the actual year-to-year fluctuations of an investment.
• Doesn't Account for Mid-Period Deposits/Withdrawals: The basic CAGR formula doesn't factor in additional investments or withdrawals made during the period.
• Ignores Risk: It's purely a growth metric and doesn't provide any insight into the risk associated with achieving that growth.
• Sensitive to Start/End Points: The calculated CAGR can be significantly affected by the choice of starting and ending points, especially if those points coincide with market highs or lows.

How to Use the CAGR Calculator

Our CAGR calculator simplifies the process:

1. Starting Value: Enter the initial value of your investment or metric. For example, if you started with $10,000.
2. Ending Value: Input the final value after the growth period. For instance, if your investment grew to $18,000.
3. Number of Years: Specify the duration of the growth period in years. For example, 5 years.
4. Calculate: Click the "Calculate CAGR" button, and the calculator will instantly display the compound annual growth rate as a percentage.

Examples of CAGR in Action

Let's look at a few scenarios:

Example 1: Investment Growth

You invested $10,000 in a stock five years ago, and its current value is $18,000.

• Starting Value: $10,000
• Ending Value: $18,000
• Number of Years: 5
• CAGR: ((18000 / 10000)^(1/5)) – 1 = (1.8^0.2) – 1 = 1.1247 – 1 = 0.1247 or 12.47%

This means your investment grew at an average annual rate of 12.47% over the five years.

Example 2: Revenue Growth

A company's annual revenue was $500,000 three years ago, and it is now $750,000.

• Starting Value: $500,000
• Ending Value: $750,000
• Number of Years: 3
• CAGR: ((750000 / 500000)^(1/3)) – 1 = (1.5^0.3333) – 1 = 1.1447 – 1 = 0.1447 or 14.47%

The company's revenue has grown at an average annual rate of 14.47% over the past three years.

Example 3: Negative Growth

An asset was worth $20,000 four years ago and is now valued at $15,000.

• Starting Value: $20,000
• Ending Value: $15,000
• Number of Years: 4
• CAGR: ((15000 / 20000)^(1/4)) – 1 = (0.75^0.25) – 1 = 0.9306 – 1 = -0.0694 or -6.94%

This indicates an average annual decline of 6.94%.

By using the CAGR calculator, you can quickly and accurately assess the compound annual growth rate for various financial and business metrics, aiding in better decision-making and performance analysis.