Compound Annual Growth Rate (CAGR) Calculator
What is Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is a financial metric that measures the mean annual rate of growth of an investment over a specified period of time longer than one year. It is used to smooth out volatility and represent the growth as if it had grown at a steady rate each year.
CAGR is a more accurate way to represent investment growth than simple average growth because it takes into account the effect of compounding. Compounding means that earnings from one period are reinvested and then earn returns in the next period, leading to exponential growth over time.
How is CAGR Calculated?
The formula for CAGR is:
CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] – 1
Where:
- Ending Value: The value of the investment at the end of the period.
- Beginning Value: The value of the investment 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.
When to Use CAGR:
- To compare the performance of different investments over time.
- To track the growth of a company's revenue or profits.
- To forecast future investment values, assuming the same growth rate continues.
Example Calculation:
Let's say you invested $10,000 in a stock at the beginning of 2018. By the end of 2022 (5 years later), your investment grew to $25,000.
- Beginning Value = $10,000
- Ending Value = $25,000
- Number of Years = 5
Using the CAGR 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 20.11% over the 5-year period, taking compounding into account.
function calculateCAGR() {
var beginningValue = parseFloat(document.getElementById("beginningValue").value);
var endingValue = parseFloat(document.getElementById("endingValue").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultDiv = document.getElementById("result");
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears) || beginningValue <= 0 || endingValue < 0 || numberOfYears <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields, and ensure the ending value is not less than zero.";
return;
}
// CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] – 1
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
resultDiv.innerHTML = "
CAGR: " + (cagr * 100).toFixed(2) + "%";
}
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