Calculate the Compound Annual Growth Rate (CAGR) of an investment or metric over a specified period.
Understanding Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a crucial financial metric used to measure the average annual rate of return of an investment or a business metric over a specified period longer than one year. It represents the smoothed-out annual growth rate, assuming that the investment or metric grew at a steady rate each year.
Why CAGR is Important
Smooths Out Volatility: Unlike simple average returns, CAGR accounts for compounding, providing a more realistic picture of growth. It smooths out the year-to-year fluctuations that can occur with investments.
Comparison Tool: CAGR allows for easy comparison between different investments or business performances over the same time frame, regardless of their individual volatility.
Performance Measurement: It's widely used by investors, financial analysts, and businesses to gauge the historical performance of assets, portfolios, or operational metrics (like revenue, profit, or user growth).
The CAGR Formula Explained
The formula for calculating CAGR is:
CAGR = ( (Ending Value / Starting 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.
Starting Value: The value of the investment or metric at the beginning of the period.
Number of Years: The total duration of the investment or period in years.
The formula essentially finds the geometric progression that would lead from the starting value to the ending value over the given number of years. Multiplying the result by 100 converts it into a percentage.
How to Use the Calculator
Our CAGR calculator simplifies this process. Simply enter:
The Starting Value of your investment or metric at the beginning of the period.
The Ending Value at the end of the period.
The Number of Years over which this growth occurred.
Click "Calculate CAGR", and the tool will provide the compound annual growth rate as a percentage.
Example Calculation
Let's say you invested $10,000 in a stock five years ago, and today it's worth $25,000.
Multiplying by 100, the CAGR is approximately 20.11%. This means your investment grew, on average, by 20.11% each year, compounded annually, to reach $25,000 from $10,000 over five years.
Limitations of CAGR
While useful, CAGR has limitations:
Doesn't reflect interim volatility: It shows the end-to-end growth, not the ups and downs experienced along the way.
Assumes constant growth: It simplifies the growth path, which rarely happens in reality.
Only useful for single periods: It's a snapshot over a defined timeframe.
CAGR is best used in conjunction with other financial metrics and analysis to get a comprehensive understanding of performance.
function calculateCAGR() {
var startValue = parseFloat(document.getElementById("startValue").value);
var endValue = parseFloat(document.getElementById("endValue").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultDiv = document.getElementById("result");
// Clear previous result and styling
resultDiv.style.display = 'none';
resultDiv.classList.remove('success-green', 'error-red'); // Remove previous classes if any
if (isNaN(startValue) || isNaN(endValue) || isNaN(numberOfYears) || startValue <= 0 || endValue < 0 || numberOfYears <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
resultDiv.style.backgroundColor = '#dc3545'; // Bootstrap danger color
resultDiv.style.display = 'block';
return;
}
// Handle case where ending value is zero or negative to avoid Math.pow errors with negative bases
if (endValue 0) {
cagr = Infinity; // Infinite growth from zero
} else {
// Calculate CAGR using the formula: ((End / Start) ^ (1 / Years)) – 1
cagr = Math.pow((endValue / startValue), (1 / numberOfYears)) – 1;
}
if (cagr === Infinity) {
resultDiv.innerHTML = "CAGR: Infinity (Growth from zero)";
resultDiv.style.backgroundColor = 'var(–success-green)';
} else {
resultDiv.innerHTML = "CAGR: " + (cagr * 100).toFixed(2) + "%";
resultDiv.style.backgroundColor = 'var(–success-green)';
}
resultDiv.style.display = 'block';
}