The Compound Annual Growth Rate (CAGR) is a key metric used to measure the average annual growth of an investment or a business over a specified period of time, assuming that profits were reinvested at the end of each year. It smooths out volatility and provides a single, representative rate of return. CAGR is particularly useful for comparing the performance of different investments or business units over the same time frame.
Unlike simple average growth rates, CAGR accounts for the compounding effect, meaning that growth in one period contributes to growth in subsequent periods. This makes it a more realistic measure of long-term performance.
The CAGR Formula
The formula to calculate CAGR is as follows:
CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] – 1
Let's break down the components:
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.
How to Use the Calculator
Beginning Value: Enter the initial value of your investment or the starting point of your metric (e.g., revenue in the first year).
Ending Value: Enter the final value of your investment or the ending point of your metric (e.g., revenue in the last year).
Number of Years: Enter the total duration of the period in years over which you are measuring growth.
Click the "Calculate CAGR" button to see the result.
Example Calculation
Suppose you invested $10,000 (Beginning Value) in a stock portfolio, and after 5 years (Number of Years), its value has grown to $25,000 (Ending Value).
Using the calculator or the formula:
CAGR = [($25,000 / $10,000)^(1 / 5)] – 1
CAGR = [(2.5)^(0.2)] – 1
CAGR = [1.2011] – 1
CAGR = 0.2011 or 20.11%
This means your investment grew at an average annual rate of approximately 20.11% over the 5-year period.
Applications of CAGR
CAGR is widely used in finance and business for:
Investment Performance Analysis: Comparing the growth of different stocks, mutual funds, or real estate investments.
Business Growth Tracking: Measuring the year-over-year growth of revenue, profits, customer base, or other key performance indicators.
Financial Planning: Projecting future values of investments based on historical growth rates.
Valuation: Assessing the historical growth trends of a company as part of a business valuation.
function calculateCAGR() {
var beginningValue = parseFloat(document.getElementById("beginningValue").value);
var endingValue = parseFloat(document.getElementById("endingValue").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var cagrResultElement = document.getElementById("cagrResult");
// Clear previous results
cagrResultElement.textContent = "–";
// Validate inputs
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (beginningValue <= 0) {
alert("Beginning Value must be a positive number.");
return;
}
if (endingValue <= 0) {
alert("Ending Value must be a positive number.");
return;
}
if (numberOfYears <= 0) {
alert("Number of Years must be a positive number.");
return;
}
// Calculate CAGR
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
// Display the result
cagrResultElement.textContent = (cagr * 100).toFixed(2) + "%";
}