Calculating a Cagr in Excel – Loan calculator

CAGR Calculator

Enter your starting value, ending value, and the number of years to calculate the Compound Annual Growth Rate.

Starting Value:

Ending Value:

Number of Years:

Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a useful metric for evaluating the average annual growth of an investment or business over a specified period longer than one year. Unlike simple annual growth, CAGR smooths out volatility and provides a more accurate representation of growth by assuming that profits are reinvested at the end of each period.

What is CAGR?

CAGR is essentially the geometric mean of annual growth rates. It's not the actual return in any single year, but rather a hypothetical rate at which an investment would have grown if it had grown at a steady rate over the specified period, assuming the profits were reinvested. This makes it an excellent tool for comparing the performance of different investments or for analyzing the historical growth of a company's revenue, profits, or other financial metrics.

Why is CAGR Important?

Smoothes Volatility: Financial performance can be erratic year-to-year. CAGR provides a single, consistent growth rate that averages out these fluctuations, offering a clearer picture of long-term trends.
Comparison Tool: It allows for an "apples-to-apples" comparison of different investments or business units over varying time frames.
Performance Evaluation: Investors and analysts use CAGR to assess the historical performance of an asset, portfolio, or company.
Forecasting: While historical, CAGR can be a basis for future growth projections, though it should be used with caution as past performance doesn't guarantee future results.

How to Calculate CAGR

The formula for CAGR is:

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

Let's break down the components:

Ending Value: The value of the investment or metric at the end of the period.
Starting Value: The value of the investment or metric at the beginning of the period.
Number of Years: The total number of years over which the growth is being measured.

Example of CAGR Calculation

Imagine you invested $100,000 in a stock portfolio. After 5 years, your portfolio is worth $150,000. Let's calculate the CAGR:

Starting Value = $100,000
Ending Value = $150,000
Number of Years = 5

Using the formula:

CAGR = (($150,000 / $100,000)^(1 / 5)) - 1

CAGR = (1.5^(0.2)) - 1

CAGR = 1.08447 - 1

CAGR = 0.08447

Expressed as a percentage, the CAGR is approximately 8.45%. This means that, on average, your investment grew by 8.45% each year over the five-year period, assuming reinvestment of returns.

Limitations of CAGR

While powerful, CAGR has limitations:

Assumes Smooth Growth: It doesn't reflect the actual year-to-year fluctuations. An investment could have had significant ups and downs, but CAGR will only show the average.
Doesn't Account for Mid-Period Deposits/Withdrawals: The basic CAGR formula assumes a single initial investment and a single final value. It doesn't easily accommodate additional contributions or withdrawals during the period.
Sensitive to Start/End Points: The chosen starting and ending points can significantly impact the calculated CAGR.

Despite these limitations, CAGR remains a fundamental tool in financial analysis for understanding long-term growth trends.