CAGR Calculator
Use this calculator to determine the Compound Annual Growth Rate (CAGR) of an investment or value over a specified period.
What is Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is a useful metric for calculating the average annual growth rate of an investment over a specified period longer than one year. It smooths out volatile returns and provides a more accurate picture of an investment's performance by assuming that profits are reinvested at the end of each period.
Unlike simple annual growth, CAGR accounts for the compounding effect, meaning it considers the growth on both the initial investment and the accumulated interest from previous periods. This makes it a more realistic measure for evaluating the performance of various investments, businesses, or other metrics over time.
CAGR Formula
The formula for Compound Annual Growth Rate is:
CAGR = ((Ending Value / Starting Value)^(1 / Number of Years)) - 1
- Ending Value: The value of the investment at the end of the period.
- Starting Value: The value of the investment at the beginning of the period.
- Number of Years: The total number of years over which the investment grew.
How to Use the CAGR Calculator
- Enter Starting Value: Input the initial value of your investment or metric. This is the value at the beginning of the period you're analyzing.
- Enter Ending Value: Input the final value of your investment or metric. This is the value at the end of the period.
- Enter Number of Years: Specify the total duration in years between the starting and ending values.
- Click "Calculate CAGR": The calculator will instantly display the Compound Annual Growth Rate as a percentage.
Example of CAGR Calculation
Let's say you invested $10,000 in a stock five years ago, and its current value is $18,000. You want to find out its average annual growth rate.
- Starting Value: $10,000
- Ending Value: $18,000
- Number of Years: 5
Using the formula:
CAGR = (($18,000 / $10,000)^(1 / 5)) - 1
CAGR = (1.8^(0.2)) - 1
CAGR = 1.1247 - 1
CAGR = 0.1247
Multiplying by 100 to get a percentage: 0.1247 * 100 = 12.47%
So, the Compound Annual Growth Rate for your investment is approximately 12.47%.
Why is CAGR Important?
- Performance Comparison: CAGR allows for easy comparison of different investments or business units, even if they have different investment horizons or volatile annual returns.
- Smoothed Growth: It provides a smoothed growth rate, which is more representative of long-term trends than individual annual returns, especially in markets with significant fluctuations.
- Forecasting: While not a guarantee of future performance, CAGR can be used as a basis for projecting future growth, assuming past trends continue.
- Investment Analysis: Investors use CAGR to understand the effectiveness of their strategies and to evaluate the efficiency of their capital allocation.
Limitations of CAGR
While powerful, CAGR has its limitations:
- Assumes Reinvestment: It assumes that all profits are reinvested at the same rate, which may not always be the case in real-world scenarios.
- Doesn't Reflect Volatility: CAGR provides an average and doesn't show the actual year-to-year fluctuations or the risk involved. An investment with a high CAGR could still have experienced significant ups and downs.
- Sensitive to Start/End Points: The calculated CAGR can be heavily influenced by the chosen starting and ending points, especially if these points coincide with market highs or lows.
- No Cash Flows: It doesn't account for additional contributions or withdrawals made during the investment period. For scenarios with intermittent cash flows, other metrics like XIRR (Extended Internal Rate of Return) might be more appropriate.
Despite these limitations, CAGR remains a fundamental tool for long-term investment analysis and performance evaluation.