Compound Annual Growth Rate (CAGR) Calculator

CAGR Calculator Overview

• CAGR stands for Compound Annual Growth Rate. It is a measure of the average annual growth rate of an investment over a specified period of time.
• The CAGR takes into account the effect of compounding, which means that the returns earned on an investment are reinvested, and the interest is earned on both the principal and the previously earned interest.
• The CAGR calculator is widely used by investors to compare the performance of different investment options, as it provides a standardized measure of growth that can be used to evaluate investments of different sizes and durations.
• It can also be used to estimate the future value of an investment based on its historical performance, although it should be noted that past performance does not guarantee future results.

 

What is CAGR?

• CAGR stands for Compound Annual Growth Rate. It is a measure of the average annual growth rate of an investment over a specified period of time.
• The CAGR takes into account the effect of compounding, which means that the returns earned on an investment are reinvested, and the interest is earned on both the principal and the previously earned interest.
• CAGR is a useful metric for comparing the performance of different investments, as it provides a standardized measure of growth that can be used to evaluate investments of different sizes and durations.
• It is also useful for evaluating the performance of an investment over a long period of time, as it takes into account the compounding effect of returns.

 

Steps To Calculate CAGR

Here are steps to calculate CAGR (Compound Annual Growth Rate) using above formula.

• Enter Initial Value
• Enter Final Value
• Enter Number of Periods
• Calculate CAGR, Difference & Total Growth

 

CAGR Formula

After the transformation, the formula for CAGR is:

CAGR = (FV / PV)^ 1 / t - 1

 

Note that the CAGR formula is more complex than the simple growth rate formula, as it takes into consideration also the investment time horizon (which may be longer than a year) and the number of compounding periods.

 

How To Calculate CAGR

For example, let's say you invested $10,000 in a mutual fund in 2015 and the investment was worth $15,000 in 2020. Here are the steps to calculate the CAGR over the 5-year period:

• Beginning value = $10,000
• Ending value = $15,000
• Number of years = 5

 

CAGR = (FV / PV)^ 1 / t - 1

CAGR = ($15,000 / $10,000) ^ (1/5) - 1

CAGR = 0.0976 or 9.76%

 

Therefore, the CAGR for the investment over the 5-year period is 9.76%. This means that the investment grew at an average annual rate of 9.76% over the 5-year period.

 

What is a Good CAGR for a Company

A good CAGR, or Compound Annual Growth Rate, for a company, can vary depending on the industry and the company's size and stage of development.

• Generally, a CAGR that is consistently higher than the industry average and the company's peers can be considered good.
• Here is a table showing some potential CAGRs for companies and their corresponding levels of growth:

 

CAGR	Level of Growth
Less than 5%	Slow growth
5% to 10%	Moderate growth
10% to 20%	Rapid growth
20% or more	Explosive growth

 

• Note that these are just rough guidelines and actual levels of growth can vary significantly depending on the industry, the company's size and stage of development, and other factors.
• Additionally, it's important to consider other financial metrics such as profitability, cash flow, and return on investment when evaluating a company's performance.

 

CAGR Advantages and Disadvantages

CAGR, or Compound Annual Growth Rate, is a widely used metric to measure investment returns over a certain period of time. Here are some advantages and disadvantages of using CAGR:

 

Advantages

• Standardized measure: CAGR provides a standardized measure of investment growth over a specific period of time, making it easier to compare the performance of different investments.
• Incorporates compounding: CAGR takes into account the effect of compounding, which is the process by which an investment's earnings are reinvested to generate additional earnings over time.
• Useful for long-term investments: CAGR is particularly useful for evaluating the performance of long-term investments, especially those that have the potential to compound returns over time.

 

Disadvantages

• Sensitive to time period: The choice of time period used to calculate CAGR can significantly impact the resulting metric. For example, CAGR calculated over a longer time period may be more favorable than one calculated over a shorter time period.
• Ignores volatility: CAGR assumes a steady rate of return over the investment period and does not take into account fluctuations in returns. As such, CAGR may not be an accurate representation of the actual investment returns over the investment period.
• Does not account for taxes and fees: CAGR does not account for taxes and fees associated with the investment, which can significantly impact the net return on investment.
• Limited usefulness for short-term investments: CAGR may not be as useful for evaluating the performance of short-term investments, as it is calculated over a period of years and may not accurately reflect the performance of investments held for shorter periods of time.

 

Overall, CAGR is a useful metric for measuring investment growth over a specific period of time, especially for long-term investments. However, it should be used in conjunction with other metrics and should not be the sole factor in making investment decisions.

 

Simple Growth Rate vs Compound Annual Growth Rate

Here is a table summarizing the difference between Simple Growth Rate and Compound Annual Growth Rate:

Metric	Simple Growth Rate	Compound Annual Growth Rate
Calculation	(Ending Value - Beginning Value) / Beginning Value × 100%	(Ending Value / Beginning Value) ^ (1 / Number of Years) - 1 × 100%
Definition	The percentage increase in value of an investment over time.	The average annual rate of growth of an investment over a period of time, taking into account the effect of compounding.
Timeframe	Any period of time.	Any period of time.
Assumptions	Assumes that the investment grows at a constant rate.	Assumes that the investment grows at a compounded rate.
Importance	Simple to calculate and useful for short-term investments.	Provides a standardized measure of growth for long-term investments.
Limitations	Does not take into account the effect of compounding.	Can be sensitive to fluctuations in returns over shorter timeframes.

 

• Overall, both Simple Growth Rate and Compound Annual Growth Rate are useful metrics for evaluating investment performance, but they are based on different assumptions and are best suited for different types of investments.
• A simple Growth Rate is easier to calculate and is useful for short-term investments, but it does not take into account the effect of compounding.

 

CAGR Calculator Benefits

The CAGR (Compound Annual Growth Rate) calculator offers several benefits to investors, including:

• Standardized measure of investment performance: CAGR provides a standardized measure of investment performance that allows investors to compare the returns of different investments over time.
• Useful for long-term investments: CAGR is particularly useful for long-term investments, as it calculates the average annual return of an investment over a specified period.
• Provides insight into volatility: CAGR takes into account the volatility of an investment's returns, providing a more accurate picture of its performance over time.
• Useful for evaluating investment options: The CAGR calculator is a powerful tool for comparing the performance of different investment options, as it provides a consistent metric for evaluating returns.
• Helps with investment decisions: The CAGR calculator can help investors make informed decisions about their investment strategies by providing insights into the historical performance of an investment and its potential future returns.

 

Summary

Overall, the CAGR calculator is a valuable tool for any investor looking to evaluate the performance of their investments, compare investment options, and make informed decisions about their investment strategies. Check More Business Related Calculator on Drlogy Calculator to get exact business and financial solutions for growth.

 

Reference

• Compound annual growth rate - Wikipedia [1].
• Compound Annual Growth Rate (CAGR) Formula and Calculation [2].