CAGR Calculator
Calculate the Compound Annual Growth Rate (CAGR) for your investments or business metrics over a specified period.
Calculated CAGR: ' + cagr.toFixed(2) + '%
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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. Unlike simple annual growth, CAGR accounts for the compounding effect, meaning it considers that earnings from previous years also generate earnings in subsequent years. This makes it a more accurate and realistic representation of growth over time, especially for investments.
Why is CAGR Important?
CAGR provides a smoothed annual growth rate, which helps in several ways:
- Performance Comparison: It allows for a standardized comparison of different investments or business units, even if they have different growth patterns or durations.
- Trend Analysis: It helps in understanding the underlying growth trend, filtering out the volatility of year-to-year 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 Evaluation: Investors use CAGR to evaluate the historical performance of stocks, mutual funds, or portfolios.
How to Calculate CAGR
The formula for Compound Annual Growth Rate is:
CAGR = ((Ending Value / Beginning Value)^(1 / Number of Years)) - 1
Let's break down the components:
- Beginning Value: The initial value of the investment or metric at the start of the period.
- Ending Value: The final value of the investment or metric at the end of the period.
- Number of Years: The total duration of the investment or period in years.
Example of CAGR Calculation
Let's say you invested $10,000 in a stock, and after 5 years, its value grew to $15,000. Using the CAGR calculator above, you would input:
- Beginning Value: $10,000
- Ending Value: $15,000
- Number of Years: 5
The calculation would be:
CAGR = (($15,000 / $10,000)^(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, considering the compounding effect.
Limitations of CAGR
While powerful, CAGR has its limitations:
- Smoothed Rate: It presents a smoothed growth rate and does not reflect the actual year-to-year volatility or interim highs and lows. An investment might have had significant ups and downs, but CAGR will only show the average.
- Assumes Reinvestment: CAGR implicitly assumes that all profits or returns are reinvested at the same rate, which might not always be the case in reality.
- Historical Data: CAGR is based on historical data and does not predict future performance. Past growth is not an indicator of future returns.
- No Cash Flows: It doesn't account for additional contributions or withdrawals made during the investment period. For scenarios with irregular cash flows, other metrics like Modified Dietz or Time-Weighted Rate of Return might be more appropriate.
Despite these limitations, CAGR remains an invaluable tool for understanding and comparing the long-term growth trajectory of various financial and business metrics.