What is CAGR? Understanding Compound Annual Growth Rate
The Compound Annual Growth Rate (CAGR) is a financial metric used to measure the year-over-year growth rate of an investment or business metric over a specified period longer than one year. It represents the smoothed-out annual rate of return, assuming that profits were reinvested at the end of each year. CAGR is a useful way to understand how an investment has performed over time, as it smooths out volatility and provides a single, representative growth rate.
The CAGR Formula
The formula for calculating CAGR is as follows:
CAGR = ((Ending Value / Starting Value) ^ (1 / Number of Years)) - 1
Where:
Ending Value: The value of the investment or metric at the end of the period.
Starting Value: The value of the investment or metric at the beginning 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 CAGR Calculator
Using this online CAGR calculator is straightforward:
Enter the Starting Value: Input the initial value of your investment or the metric you are analyzing at the beginning of your chosen period.
Enter the Ending Value: Input the final value of your investment or metric at the end of the period.
Enter the Number of Years: Specify the total duration of the investment period in years.
Click "Calculate CAGR": The calculator will instantly display the Compound Annual Growth Rate as a percentage.
Why is CAGR Important?
CAGR is an essential tool for investors, financial analysts, and business owners for several reasons:
Performance Measurement: It provides a clear picture of investment performance over time, allowing for easy comparison between different investments.
Forecasting: While not a predictor of future performance, CAGR can be used as a basis for future financial projections.
Simplification: It simplifies complex growth patterns into a single, understandable annual rate.
Benchmarking: Businesses can use CAGR to benchmark their growth against industry averages or competitors.
For example, if an investment started at $1,000 and grew to $5,000 over 5 years, the CAGR calculator would determine the average annual growth rate that smoothed out the entire period. This helps in understanding the effectiveness of the investment strategy.
function calculateCAGR() {
var startingValueInput = document.getElementById("startingValue");
var endingValueInput = document.getElementById("endingValue");
var numberOfYearsInput = document.getElementById("numberOfYears");
var cagrResultDiv = document.getElementById("cagrResult");
var startingValue = parseFloat(startingValueInput.value);
var endingValue = parseFloat(endingValueInput.value);
var numberOfYears = parseFloat(numberOfYearsInput.value);
if (isNaN(startingValue) || isNaN(endingValue) || isNaN(numberOfYears)) {
cagrResultDiv.textContent = "Invalid input. Please enter numbers.";
return;
}
if (startingValue <= 0) {
cagrResultDiv.textContent = "Starting value must be greater than 0.";
return;
}
if (numberOfYears <= 0) {
cagrResultDiv.textContent = "Number of years must be greater than 0.";
return;
}
var cagr = Math.pow((endingValue / startingValue), (1 / numberOfYears)) – 1;
if (isNaN(cagr) || !isFinite(cagr)) {
cagrResultDiv.textContent = "Calculation error.";
return;
}
cagrResultDiv.textContent = (cagr * 100).toFixed(2) + " %";
}