Understanding Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a vital metric used to measure the average annual rate at which an investment has grown over a specified period, assuming that profits were reinvested at the end of each year. It smooths out volatility and provides a more representative measure of growth than simple average growth rates.
Why is CAGR Important?
CAGR is particularly useful for:
- Investment Analysis: Comparing the performance of different investments over the same timeframe.
- Business Growth: Assessing a company's revenue or profit growth trajectory.
- Forecasting: Projecting future values based on historical growth trends.
It's important to note that CAGR represents a hypothetical constant rate of return; actual returns can fluctuate significantly year over year.
How to Calculate CAGR
The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1
To express this as a percentage, you multiply the result by 100.
Example Calculation
Let's say you invested $10,000 in a stock at the beginning of 2019. By the end of 2023 (a period of 5 years), your investment has grown to $25,000. Here's how 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
As a percentage: 0.2011 * 100 = 20.11%
This means your investment grew at an average annual rate of 20.11% over the 5-year period.
function calculateCAGR() {
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if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears) || beginningValue <= 0 || endingValue < 0 || numberOfYears <= 0) {
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return;
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var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
var cagrPercentage = cagr * 100;
resultDiv.innerHTML = "The Compound Annual Growth Rate (CAGR) is:
";
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