What is Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is a metric that provides a smoothed-out rate of return for an investment over a period longer than one year. It represents the annual growth rate of an investment, assuming that profits were reinvested at the end of each year of the investment's lifespan. CAGR is often used to compare the historical performance of different investments, as it normalizes returns over time.
CAGR is particularly useful because it smooths out volatility and presents a single representative growth rate over a specified period. This makes it easier to understand and compare the performance of various investments or business metrics.
How to Calculate CAGR
The formula for calculating CAGR is as follows:
CAGR = ( (Ending Value / Beginning Value) ^ (1 / Number of Years) ) – 1
Where:
- Ending Value: The value of the investment at the end of the period.
- Beginning Value: The value of the investment at the beginning of the period.
- Number of Years: The total number of years in the investment period.
Example Calculation:
Let's say you invested $10,000 in a stock (Beginning Value). After 5 years (Number of Years), the value of your investment has grown to $25,000 (Ending Value).
Using the CAGR formula:
CAGR = ( ($25,000 / $10,000) ^ (1 / 5) ) – 1
CAGR = ( (2.5) ^ (0.2) ) – 1
CAGR = (1.2011) – 1
CAGR = 0.2011 or 20.11%
This means your investment grew at an average annual rate of 20.11% over the 5-year period.
function calculateCAGR() {
var beginningValue = parseFloat(document.getElementById("beginningValue").value);
var endingValue = parseFloat(document.getElementById("endingValue").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (beginningValue <= 0) {
resultDiv.innerHTML = "Beginning Value must be greater than zero.";
return;
}
if (numberOfYears <= 0) {
resultDiv.innerHTML = "Number of Years must be greater than zero.";
return;
}
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
if (isNaN(cagr)) {
resultDiv.innerHTML = "Calculation resulted in an invalid number. Please check your inputs.";
return;
}
resultDiv.innerHTML = "
Your CAGR Result:
" + (cagr * 100).toFixed(2) + "%";
}
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