Compound Annual Growth Rate (CAGR) Calculator
Understanding the Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a widely used metric to measure the average annual rate of return of an investment over a specific period of time, assuming that profits were reinvested at the end of each year. It smooths out volatility and provides a single figure that represents the growth rate an investment would have experienced if it had grown at a steady rate each year.
Why is CAGR Important?
CAGR is a powerful tool for investors and businesses because it:
- Provides a Smoothed Growth Figure: Unlike simple average returns, CAGR accounts for compounding, giving a more realistic picture of long-term performance.
- Enables Comparison: It allows for easy comparison of the performance of different investments or business units over identical time frames.
- Helps in Forecasting: While not a predictive tool, it can be used as a basis for estimating 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
To implement this, you need three key pieces of information:
- Beginning Value: The initial value of the investment at the start of the period.
- Ending Value: The final value of the investment at the end of the period.
- Number of Years: The total duration of the investment period.
Example Calculation
Let's say you invested $10,000 in a stock five years ago, and today its value is $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 or 20.11%
This means your investment grew at an average annual rate of 20.11% over the five-year period.
Limitations of CAGR
While useful, CAGR has limitations. It doesn't account for the volatility or risk associated with an investment during the period. An investment with a high CAGR might have experienced significant fluctuations, while another with a lower CAGR might have had a smoother, steadier growth path.
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("cagrResult");
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears) || beginningValue <= 0 || numberOfYears <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
var cagrPercentage = (cagr * 100).toFixed(2);
resultDiv.innerHTML = "
CAGR Result:
Your Compound Annual Growth Rate is:
" + cagrPercentage + "%";
}
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