How to Calculate a Growth Rate

by

Compound Annual Growth Rate (CAGR) Calculator

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"); if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears) || beginningValue <= 0 || numberOfYears <= 0) { resultDiv.innerHTML = "Please enter valid positive numbers for all fields."; return; } if (endingValue < 0) { resultDiv.innerHTML = "Ending Value cannot be negative."; return; } var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1; var percentageCAGR = (cagr * 100).toFixed(2); resultDiv.innerHTML = "The Compound Annual Growth Rate (CAGR) is: " + percentageCAGR + "%"; }

Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a powerful metric used to measure the average annual rate at which an investment or business metric has grown over a specified period longer than one year. It smooths out volatility and provides a representative growth figure, making it easier to compare performance over time or against benchmarks.

Why Use CAGR?

CAGR is preferred over simple average growth rates because it accounts for the effect of compounding. Compounding means that growth in one period is added to the base for calculating growth in the next period. This results in a more realistic picture of long-term performance. It's particularly useful for:

  • Tracking the growth of revenue, profits, or market share for businesses.
  • Evaluating the historical performance of investments like stocks, mutual funds, or real estate.
  • Forecasting potential future growth based on historical trends.

How to Calculate CAGR

The formula for CAGR is:

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1

Let's break down the components:

  • Beginning Value: This is the starting value of your investment or metric at the beginning of the period.
  • Ending Value: This is the final value of your investment or metric at the end of the period.
  • Number of Years: This is the total duration of the period in years.

Example Calculation

Suppose you invested $10,000 in a mutual fund five years ago, and today it's worth $25,000. To calculate the CAGR:

  • Beginning Value = $10,000
  • Ending Value = $25,000
  • Number of Years = 5

Using the formula:

CAGR = ($25,000 / $10,000)^(1 / 5) – 1

CAGR = (2.5)^(0.2) – 1

CAGR = 1.2011 – 1

CAGR = 0.2011

To express this as a percentage, multiply by 100:

CAGR = 0.2011 * 100 = 20.11%

This means your investment grew at an average annual rate of 20.11% over the five-year period, accounting for compounding.

Important Considerations

While CAGR is a valuable tool, remember that it represents an average. Actual year-over-year growth can fluctuate significantly. It's also essential to ensure the beginning and ending values represent comparable metrics and that the time period is consistent.

Leave a Comment