Compound Annual Growth Rate (CAGR) Calculator
Understanding Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a crucial metric used to measure the average annual rate at which an investment has grown over a specified period of time, assuming that profits were reinvested at the end of each year of the investment's lifespan. CAGR is often used to compare the performance of different investments over time, as it smooths out volatility and provides a single, representative growth rate.
Why is CAGR Important?
- Performance Measurement: CAGR offers a clear and standardized way to assess how well an investment, portfolio, or business segment has performed.
- Comparison: It allows for a like-for-like comparison between investments with different initial values and durations.
- Forecasting: While not a predictor of future results, CAGR can be used to project potential future values based on historical performance, assuming the growth rate remains consistent.
- Smoothing Volatility: Unlike simple annual returns, CAGR accounts for the compounding effect and ignores the year-to-year fluctuations, providing a more stable view of growth.
How is CAGR Calculated?
The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1
Let's break down the components:
- Ending Value: The value of the investment at the end of the period.
- Beginning Value: The value of the investment at the start of the period.
- Number of Years: The total duration of the investment period in years.
Example Calculation:
Imagine you invested $10,000 in a mutual fund five years ago, and today its value has grown to $15,000.
- Beginning Value = $10,000
- Ending Value = $15,000
- Number of Years = 5
Using the CAGR formula:
CAGR = ($15,000 / $10,000)^(1 / 5) – 1
CAGR = (1.5)^(0.2) – 1
CAGR = 1.08447 – 1
CAGR = 0.08447
To express this as a percentage, multiply by 100:
CAGR = 8.45%
This means your investment grew at an average annual rate of approximately 8.45% over the five-year period.
Limitations of CAGR:
While useful, CAGR doesn't tell the whole story. It assumes a smooth growth path and doesn't account for the risk taken to achieve that growth. It also doesn't reflect interim performance or dividend reinvestment strategies.
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;
}
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
var formattedCAGR = (cagr * 100).toFixed(2);
resultDiv.innerHTML = "The Compound Annual Growth Rate (CAGR) is:
" + formattedCAGR + "%";
}
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