The Compound Annual Growth Rate (CAGR) is a metric used to measure the average annual growth of an investment or a business metric over a specified period longer than one year. It represents the rate at which an investment would have grown if it had grown at a steady rate each year. CAGR smooths out volatility, providing a more stable representation of growth compared to simple year-over-year changes.
CAGR is widely used in finance to compare the historical performance of investments, evaluate the growth of companies, and forecast future performance. It's particularly useful when dealing with investments that fluctuate significantly year by year, as it provides a consistent measure of growth.
The CAGR Formula
The formula for calculating CAGR is as follows:
CAGR = ( (Ending Value / Beginning Value)^(1 / Number of Years) ) - 1
How to Use the Calculator
To use this calculator, you will need three pieces of information:
Beginning Value: The initial value of your investment or metric at the start of the period. For example, if you invested $1,000 at the beginning of a 5-year period, this would be 1000.
Ending Value: The final value of your investment or metric at the end of the period. If your investment grew to $5,000 after 5 years, this would be 5000.
Number of Years: The total duration of the investment period in years. In the example above, this would be 5.
Enter these values into the respective fields and click "Calculate CAGR". The calculator will then provide you with the compound annual growth rate as a percentage.
Example Calculation
Let's say you invested $10,000 in a mutual fund at the beginning of 2019. By the end of 2023 (a period of 5 years), your investment has grown to $22,000.
Beginning Value: $10,000
Ending Value: $22,000
Number of Years: 5
Plugging these into the formula:
CAGR = ( ($22,000 / $10,000)^(1 / 5) ) - 1
CAGR = ( (2.2)^(0.2) ) - 1
CAGR = (1.1699) - 1
CAGR = 0.1699
Converting this decimal to a percentage, your CAGR is approximately 16.99%. This means your investment grew at an average annual rate of 16.99% over the 5-year period.
Why CAGR Matters
CAGR provides a valuable perspective by neutralizing the effects of volatility. It helps investors and analysts:
Benchmark investment performance against other assets or indices.
Understand the sustainable growth rate of a business over time.
Make more informed decisions by looking at a smoothed growth trend.
While CAGR is a powerful tool, it's important to remember that it represents an average and doesn't reflect the actual year-to-year fluctuations. It's best used in conjunction with other financial metrics for a comprehensive analysis.
function calculateCAGR() {
var beginningValueInput = document.getElementById("beginningValue");
var endingValueInput = document.getElementById("endingValue");
var numberOfYearsInput = document.getElementById("numberOfYears");
var resultDisplay = document.getElementById("result");
var beginningValue = parseFloat(beginningValueInput.value);
var endingValue = parseFloat(endingValueInput.value);
var numberOfYears = parseFloat(numberOfYearsInput.value);
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears)) {
resultDisplay.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (beginningValue <= 0) {
resultDisplay.innerHTML = "Beginning Value must be greater than zero.";
return;
}
if (numberOfYears <= 0) {
resultDisplay.innerHTML = "Number of Years must be greater than zero.";
return;
}
var cagr = (Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1) * 100;
if (isNaN(cagr)) {
resultDisplay.innerHTML = "Calculation error. Please check your inputs.";
} else {
resultDisplay.innerHTML = "CAGR: " + cagr.toFixed(2) + "%";
}
}