How to Calculate Annual Compound Growth Rate

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Understanding and Calculating 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 or metric has grown over a specified period of time, assuming that the profits were reinvested at the end of each year. It smooths out volatility and provides a more stable representation of growth than simple year-over-year comparisons. CAGR is widely used in finance to compare the historical performance of investments, such as stocks, mutual funds, or entire portfolios, and in business to track the growth of revenue, profits, or market share.

Why Use CAGR?

  • Smooths Volatility: It provides a single, representative growth rate over time, ignoring the ups and downs that occur from year to year.
  • Comparability: CAGR allows for easy comparison of the performance of different investments or business metrics over the same or different time periods.
  • Forecasting: While not a guarantee of future performance, CAGR can be used as a basis for projecting future values based on historical trends.

The CAGR Formula

The formula to calculate CAGR is:

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

Where:

  • Ending Value: The value of the investment or metric at the end of the period.
  • Beginning Value: The value of the investment or metric at the start of the period.
  • Number of Years: The total number of years in the period.

The result is typically expressed as a percentage.

How to Use the Calculator

Our Compound Annual Growth Rate (CAGR) calculator simplifies this process. Simply:

  1. Enter the Initial Value (the value at the beginning of your period).
  2. Enter the Final Value (the value at the end of your period).
  3. Enter the Number of Years over which this growth occurred.
  4. Click the "Calculate CAGR" button.

The calculator will then display the Compound Annual Growth Rate as a percentage.

Example Calculation

Let's say you invested $10,000 in a stock five years ago, and today its value has grown to $15,000. To find the CAGR:

  • Initial Value = 10,000
  • Final Value = 15,000
  • Number of Years = 5

Using the formula:

CAGR = ((15,000 / 10,000)^(1 / 5)) – 1

CAGR = ((1.5)^(0.2)) – 1

CAGR = 1.08447 – 1

CAGR = 0.08447

Converting to a percentage, the CAGR is approximately 8.45%. This means your investment grew, on average, by 8.45% each year, compounded annually.

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