How to Use Excel to Calculate

Compound Annual Growth Rate (CAGR) Calculator

Calculated CAGR:

" + (cagr * 100).toFixed(2) + "%

The Compound Annual Growth Rate (CAGR) is a crucial metric for understanding the smoothed annual growth rate of an investment or any value over a specified period longer than one year. Unlike simple annual growth, CAGR accounts for the compounding effect, providing a more accurate representation of an asset's performance over time.

What is Compound Annual Growth Rate (CAGR)?

CAGR represents the average annual growth rate of an investment over a specified period, assuming the profits are reinvested at the end of each year. It smooths out volatile returns, giving you a single, consistent growth rate that would have led to the final value from the initial value, assuming growth compounded over the period. It's widely used in finance, business analysis, and marketing to compare the performance of different investments or business segments.

The CAGR Formula

The formula for Compound Annual Growth Rate is:

CAGR = (Ending Value / Starting Value)^(1 / Number of Periods) - 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 Periods: The number of years (or periods) over which the investment has grown.

How to Calculate CAGR in Excel

Excel is an excellent tool for calculating CAGR due to its powerful functions. Here's how you can do it:

Method 1: Using the POWER Function

This method directly applies the CAGR formula using Excel's POWER function.

1. Input Your Data:
   • In cell A1, enter "Starting Value". In cell B1, enter your starting value (e.g., 10000).
   • In cell A2, enter "Ending Value". In cell B2, enter your ending value (e.g., 15000).
   • In cell A3, enter "Number of Periods (Years)". In cell B3, enter the number of years (e.g., 5).
2. Enter the Formula: In cell A4 (or any empty cell), type the following formula:

   =(POWER(B2/B1, 1/B3) - 1)

3. Format as Percentage: Select the cell with the formula, then click the "Percent Style" button (%) in the "Number" group on the Home tab to display the result as a percentage. You can also adjust the number of decimal places.

Example: If your starting value is $10,000, ending value is $15,000, and the period is 5 years, the formula would calculate: (15000/10000)^(1/5) - 1 = (1.5)^(0.2) - 1 ≈ 1.08447 - 1 = 0.08447, or 8.45%.

Method 2: Using the RATE Function (for specific scenarios)

While POWER is more direct for CAGR, the RATE function can also be adapted, especially if you think of CAGR as the interest rate for a single investment over time. However, it's typically used for annuities or loans.

The RATE function syntax is: RATE(nper, pmt, pv, [fv], [type], [guess])

For CAGR, you can use it as:

=RATE(B3, 0, -B1, B2)

• nper (B3): Number of periods (years).
• pmt (0): Payment made each period (0 for CAGR as there are no intermediate payments).
• pv (-B1): Present value (starting value). It must be entered as a negative number because it's an outflow.
• fv (B2): Future value (ending value).

This will yield the same result as the POWER function method.

Using the CAGR Calculator Above

Our online CAGR calculator simplifies this process for you:

1. Enter Starting Value: Input the initial value of your investment or metric.
2. Enter Ending Value: Input the final value after the growth period.
3. Enter Number of Periods (Years): Specify the total number of years over which the growth occurred.
4. Click "Calculate CAGR": The calculator will instantly display the Compound Annual Growth Rate as a percentage.

Example Scenario

Let's say a company's annual revenue grew from $500,000 in 2018 to $850,000 in 2023. We want to find the CAGR for this 5-year period (2018 to 2023 is 5 periods).

• Starting Value: $500,000
• Ending Value: $850,000
• Number of Periods: 5 years

Using the formula: CAGR = ($850,000 / $500,000)^(1 / 5) - 1

CAGR = (1.7)^(0.2) - 1

CAGR ≈ 1.1118 - 1

CAGR ≈ 0.1118 or 11.18%

This means the company's revenue grew at an average annual rate of 11.18% over these five years, assuming consistent compounding.

Limitations of CAGR

While useful, CAGR has limitations:

• Doesn't show volatility: It provides a smoothed rate and doesn't reflect the actual year-to-year fluctuations. An investment could have had significant ups and downs but still show a steady CAGR.
• Assumes reinvestment: It assumes that all profits are reinvested at the same rate, which might not always be the case in reality.
• Sensitive to start/end points: The chosen starting and ending points can significantly impact the calculated CAGR, especially if those points represent unusual highs or lows.

Conclusion

CAGR is a powerful tool for evaluating the performance of investments or business metrics over multiple periods. By understanding its formula and how to calculate it in Excel, you can gain deeper insights into growth trends. Remember to consider its limitations and use it in conjunction with other metrics for a comprehensive analysis.