Compound Growth Rate Calculator
Understanding Compound Growth Rate
The Compound Growth Rate (CGR), often referred to as the Compound Annual Growth Rate (CAGR) when applied over years, measures the average annual rate of growth of an investment or a metric over a specified period of time, assuming that profits are reinvested.
How it Works:
Unlike simple growth which calculates growth based only on the initial amount, compound growth accounts for the growth of the growth. This means that each period's growth is calculated on the value from the previous period, including any accumulated growth. This leads to a more powerful and realistic representation of growth over time, especially for investments.
Formula:
The formula to calculate the Compound Growth Rate is:
CGR = ( (Final Value / Initial Value)^(1 / Number of Periods) ) – 1
In this formula:
- Initial Value: The starting value of the investment or metric.
- Final Value: The ending value of the investment or metric after a certain number of periods.
- Number of Periods: The total number of time intervals (e.g., years) over which the growth is measured.
Why is it Important?
The CGR is a crucial metric for investors, businesses, and analysts because it smooths out volatility and provides a single, representative rate of growth. It helps in comparing the performance of different investments over time, forecasting future performance, and understanding the true rate at which something has expanded.
Example:
Let's say you invested $1,000 (Initial Value) in a stock. After 5 years (Number of Periods), your investment has grown to $1,500 (Final Value).
Using the formula:
CGR = ( ($1500 / $1000)^(1 / 5) ) – 1
CGR = ( 1.5^(0.2) ) – 1
CGR = 1.08447 – 1
CGR = 0.08447
To express this as a percentage, we multiply by 100:
CGR = 8.45%
This means your investment grew at an average compounded rate of approximately 8.45% per year over the 5-year period.