How to Calculate Average Growth Rate

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Average Growth Rate Calculator

function calculateAverageGrowthRate() { var initialValue = parseFloat(document.getElementById("initialValue").value); var finalValue = parseFloat(document.getElementById("finalValue").value); var numberOfPeriods = parseFloat(document.getElementById("numberOfPeriods").value); var resultDiv = document.getElementById("result"); if (isNaN(initialValue) || isNaN(finalValue) || isNaN(numberOfPeriods) || numberOfPeriods <= 0 || initialValue <= 0) { resultDiv.innerHTML = "Please enter valid positive numbers for all fields, with at least one period."; return; } // Formula for Average Growth Rate (Compound Annual Growth Rate – CAGR) // CAGR = ( (Ending Value / Starting Value) ^ (1 / Number of Periods) ) – 1 var growthRate = Math.pow((finalValue / initialValue), (1 / numberOfPeriods)) – 1; var percentageGrowthRate = growthRate * 100; resultDiv.innerHTML = "Average Growth Rate: " + percentageGrowthRate.toFixed(2) + "% per period"; }

Understanding Average Growth Rate

The Average Growth Rate, often calculated using the Compound Annual Growth Rate (CAGR) formula, is a crucial metric for understanding the performance of an investment, a business metric, or any value that changes over a specific period. It represents the mean rate at which a value has increased or decreased over that time, assuming the growth occurred at a steady rate each period.

How it's Calculated

The formula for Average Growth Rate (CAGR) is as follows:

CAGR = [ (Ending Value / Starting Value) ^ (1 / Number of Periods) ] – 1

Where:

  • Starting Value: The initial value of the metric at the beginning of the period.
  • Ending Value: The final value of the metric at the end of the period.
  • Number of Periods: The total number of time intervals (e.g., years, quarters, months) over which the growth occurred.

The result is typically expressed as a percentage, indicating the annualized or periodized growth.

Why is it Important?

The Average Growth Rate provides a smoothed-out view of growth, which is more informative than simply looking at the start and end points. It helps to:

  • Compare performance: Easily compare the growth of different investments or business segments over the same period.
  • Forecast future trends: While not a guarantee, it can be used as a basis for projecting future growth if past trends are expected to continue.
  • Assess stability: A steady CAGR can indicate consistent performance, whereas fluctuating growth rates might suggest volatility.

Example Calculation

Let's say you invested $1,000 in a stock at the beginning of 2019, and by the end of 2023, its value had grown to $1,800. The number of periods (years) is 5.

  • Starting Value = $1,000
  • Ending Value = $1,800
  • Number of Periods = 5

Using the formula:

CAGR = [ ($1,800 / $1,000) ^ (1 / 5) ] – 1

CAGR = [ 1.8 ^ 0.2 ] – 1

CAGR = 1.1247 – 1

CAGR = 0.1247

As a percentage, this is 12.47%. This means your investment grew at an average rate of 12.47% per year over those five years.

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